Hedge funds turn net sellers of US stocks at 2.4-to-1 short ratio

Hedge funds flipped to net selling of US equities last week, with short bets outpacing new longs by 2.4 to 1, Goldman Sachs prime brokerage data show.

"Net leverage has pushed to four-year highs," said Lee Coppersmith, a trader at Goldman Sachs, in a note circulated to clients this month.

The selling was concentrated in macro products — index and exchange-traded fund baskets — which posted their first net outflow in five weeks with a short-to-long ratio of 3.8 to 1. Individual stocks globally saw net buying, with longs exceeding shorts by 1.5 to 1, suggesting the shift was a macro hedge rather than a wholesale retreat from equities. Seven of 11 GICS sectors recorded net buying, with financials, materials and energy attracting inflows. Technology and industrials led the selloff, consistent with ETF-level shorting in tech products.

The repositioning comes as JPMorgan Chase & Co. warns that quarter-end rebalancing could trigger as much as $165 billion in equity sales, with Japan's $1.9 trillion Government Pension Investment Fund alone accounting for about $60 billion. The combination of elevated hedge fund leverage — gross leverage near 294%, a five-year high — and concentrated AI bets leaves the market vulnerable to sharp moves if volatility spikes.

Leverage Stays Elevated Even as Selling Picks Up

Despite the shift to net selling, hedge funds did not aggressively cut net exposure. Net leverage held at 54.5%, in the 74th percentile of the past year, while the fundamental long-short ratio rose to 1.714, near a one-year high. Total leverage fell 3.4 percentage points to 207.3%, landing in the 4th percentile — the lowest in a year — indicating managers reduced gross exposure but maintained conviction in their long positions.

The divergence between falling gross leverage and stable net leverage points to a targeted reduction in risk rather than broad de-risking. Hedge fund strategies still gained 4.53% during the period, outpacing the MSCI All-Country World Index's 1.89% advance.

The selling coincided with a hawkish hold from the Federal Reserve under new Chair Kevin Warsh, who flagged a possible rate hike this year. The US 10-year Treasury yield rose and the dollar strengthened as rate-cut bets were repriced. JPMorgan strategist Nikolaos Panigirtzoglou warned that stretched positioning in semiconductors — whose share of global equity value is now more than six times their share of revenue — raises the risk of more frequent value-at-risk shocks that force funds to unwind positions.

This article is for informational purposes only and does not constitute investment advice.