Global hedge fund borrowing hits five-year peak
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 US 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 previous week, Goldman said in a note.
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, it said.
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 Thursday last week after three straight weeks of selling and bought the dip in global equities particularly in the US and Europe, the bank said.
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 had 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.
HEDGE FUNDS BOUGHT STOCKS IN TECH, HEALTHCARE, REAL ESTATE AND INDUSTRIALS