Hedge fund leverage hits five-year high, according to Goldman Sachs

Hedge fund leverage hit a five-year high last week, with speculators buying banks, trading companies and insurance firms, Goldman Sachs data (GS.N) showed, after US interest rates held steady and just before US attacks on Iran’s nuclear sites.

The US Federal Reserve held interest rates steady on Wednesday last week and indicated they were in no rush to cut interest rates.

The US attacked Iranian nuclear sites on Saturday, which sent oil prices towards a year-high on Monday, with further expected price gains mounting on fears that an Iranian retaliation may include a closure of the Strait of Hormuz, through which roughly a fifth of global crude supply flows.

Gross leverage, a gauge of how much hedge funds are trading, rose to roughly 294 per cent, the most since 2020. Leverage was at 271.8 per cent at the start of the year.

Hedge funds upped their short positions on Europe and Asia, while remaining modestly long on North American stock, according to the note to clients from Goldman Sachs prime brokerage data.

A short position expects a stock price to fall, whereas a long position bets it will rise.

Financial stocks including banks, insurance companies and trading firms featured as one of the most popular stock sectors last week. The balance sheets of these firms benefit from higher rates, particularly banks, which collect payments when they lend money to corporates and consumers.

Hedge funds bought financial firms’ stock in North America and Europe, but held a slight short in these shares in Asia, the Goldman Sachs note showed.

Hedge funds ended the week with a net long position in energy stocks as well, it said.

Global stock picking returns ticked up over 4 per cent so far this year, with returns in Europe surpassing 10 per cent. Global systematic returns reached almost 12 per cent, the note said.