Global hedge funds are heading into the US presidential election with significantly higher equity leverage in their portfolios than at the start of the year, signalling an increased appetite for risk, according to a report by Bloomberg.
The report cites data from Goldman Sachs as showing that, year-to-date, hedge funds have increased leverage by 20.6%, a stark contrast to the cautious positioning seen in previous election cycles.
Leverage allows hedge funds to amplify returns by borrowing from prime brokers, though it also heightens the potential for losses if trades do not perform as expected. The current leverage uptick diverges sharply from the approach taken during the 2020 election, when hedge funds reduced leverage by 3.1% as Republican candidate Donald Trump faced off against President Joe Biden. In earlier cycles, leverage also rose but at a slower pace: by 12.1% in 2016 and 5.6% in 2012.
This increased risk exposure comes amid a strong year for equities, driven by a robust US economy and bullish sentiment around the tech sector. The S&P 500 has risen over 20% year-to-date, with the Nasdaq up 22%, underscoring the optimism that has fuelled hedge funds’ appetite for higher market exposure.
Goldman Sachs tracks hedge funds’ gross leverage, which combines long and short equity positions to gauge overall market exposure. Barclays recently noted that hedge funds increased their equity holdings in October, returning to an “above-average level” of exposure. While this positioning reflects elevated risk-taking, Barclays suggests there is still room for additional investments, especially as macro and long/short funds continue to add equities to their portfolios.