Top Stories
Hedge fund borrowing hits five-year peak, Goldman Sachs says
Global Banking & Finance Review®
Company
By Nell Mackenzie
LONDON (Reuters) – Global hedge fund borrowing rose to a five-year high in the week to April 19, a Goldman Sachs note showed, as hedge funds ramped up trading to take advantage of the first sharp dip in U.S. and European stocks this year.
Banks give hedge funds leverage, essentially a loan to fund investing, which amplifies hedge fund returns but can also increase losses.
Gross leverage, or total borrowing, reached 270% after rising 2.6 points from the prior week, Goldman said in a note released Friday and seen by Reuters on Monday.
Hedge funds’ overall net leverage, which measures a fund’s total assets including borrowing against what it actually owns, ticked up 0.5 points to 73% last week, said Goldman Sachs.
Stock picking hedge funds not using algorithms to trade were the type of hedge fund that ratcheted up leverage levels, the note added. It did not give a number for systematic hedge fund leverage.
Leverage can be used to take bets against stocks but also to fund the derivatives trades that bet their values will rise. A short trade bets that an asset will fall in value.
Hedge funds U-turned stock bets on Wednesday and Thursday last week after three straight weeks of selling and bought the dip in global equities particularly in the U.S. and Europe, said the bank.
The S&P 500 last week fell more than 5% from its March 28 closing high, its biggest retreat since October, while the broadest European index of stocks fell 1.2% in its biggest weekly decline since mid-January.
Though rare, sharp dips and recoveries are not uncommon: the S&P 500 has experienced an average of three pullbacks of 5% or more every year since 1929, a Bank of America analysis showed.
Hedge funds focused bullish trades on technology companies, which had the highest level of net buying in two months. But traders remained short consumer discretionary stocks, such as luxury and travel, the Goldman note said.
Hedge funds bought stocks in most sectors including healthcare, tech, real estate and industrials, it added.
Single stocks saw the largest notional long buying in over a year, while macro products were net sold for the third straight week led by short sales, Goldman said.
North America and Europe were net bought on the week, while Asia was net sold.
(Reporting by Nell Mackenzie; Editing by Dhara Ranasinghe and Mark Potter)
Leverage refers to the use of borrowed capital to increase the potential return of an investment. In hedge funds, it amplifies both gains and losses.
Hedge funds are investment funds that employ various strategies to earn active returns for their investors, often using leverage and derivatives.
Net leverage is a financial metric that measures a fund's total assets, including borrowing, against what it actually owns, indicating the level of debt used.
Gross leverage refers to the total amount of debt a hedge fund uses in relation to its equity, reflecting the overall risk exposure.
A short trade involves borrowing an asset and selling it with the expectation that its price will decline, allowing the trader to buy it back at a lower price.
Explore more articles in the Top Stories category
