Michael Cembalest, chairman of market and investment strategy at JP Morgan Asset Management, has highlighted several “warning signs” in the hedge fund sector, despite strong overall performance this year, according to a report by Institutional investor.
Cembalest noted that hedge funds are showing record levels of crowding, concentration, and high-beta exposure, with leverage rising sharply in some strategies. He cited Goldman Sachs research showing that funds have around 15% of portfolios in the “Magnificent Seven” tech stocks, up from 5% in 2018, and that the average hedge fund now holds 70% of its long portfolio in just ten positions, near historic concentration highs.
Macro and relative value strategies have also seen leverage expand dramatically, with some funds levered up to 45 times capital, though JP Morgan’s internal analysis suggests overall leverage is comparable to prior periods.
Despite these risks, hedge funds have posted strong returns in 2025, with HFR reporting over 10% gains through October, and inflows reaching $71bn, the highest since 2014. Cembalest emphasised that well-diversified hedge fund portfolios continue to outperform risk-adjusted benchmarks.
