By Anirban Sen and Nell Mackenzie
NEW YORK, Dec 3 (Reuters) – Hedge funds are using near-record levels of leverage to trade equities and betting on debt-backed strategies in efforts to juice returns, making the most of markets buoyed by a boom in artificial intelligence.
Over the past few years, debt-fueled strategies have surged as funds have become larger and more complex. That trend is starting to raise concerns about whether the higher use of leverage could expose them and the broader market to steeper losses in the event of a correction.
“We are seeing leverage around historical highs on our books,” said John Schlegel, head of positioning intelligence at JPMorgan. “When you look at the amount of exposure relative to liquidity in the markets, markets have gone up pretty materially from pre-COVID to now – much faster than the hedge fund AUM (assets under management) has.”
Data compiled by Goldman Sachs, JPMorgan, and Morgan Stanley, the largest global prime brokerages, shows that leverage used to bolster returns for traditional hedge funds that go long or short on stocks is close to an all-time high and continues to rise, depending on the bank. These reports were sent in recent weeks to a restricted group of clients and seen by Reuters.
Goldman’s prime brokerage data showed that in November, U.S. gross and net leverage for hedge funds across the board increased. Hedge funds’ gross leverage globally, which includes investor money and trading positions, sits at nearly three times their books, or 285.2%, up about 12.4 percentage points this year to date, which is close to an all-time record, according to Goldman’s data. That data means that for every $100 of capital from investors, hedge funds on average had roughly $300 in long and short positions. U.S. hedge fund stock pickers’ leverage stood at a three-year high, Goldman’s data showed.
JPMorgan’s November-end data showed that gross leverage levels have reached 297.9%, the highest point in the last five years and close to an all-time high. Quantitative and multi-strategy funds’ leverage at the end of last month averaged 645.3% and 444.3%, respectively, the bank’s report said.
Morgan Stanley’s note, compiled by its prime brokerage team and sent to clients on December 1, shows gross leverage for U.S. hedge funds at more than two times, adding that levels were higher only 1% of the time when tracked in the last 15 years.
Goldman and Morgan Stanley declined to comment beyond what was contained in the reports.
Three hedge fund managers and one prime brokerage executive told Reuters that when hedge funds offset buy and sell trades, leverage offered by banks ranged higher. The hedge fund sources said they received leverage levels of at least 10 times, which is near a historical high. A short position bets that asset prices will decline.
The rise in leverage levels has coincided with ongoing bullishness among hedge funds across different strategies, despite a recent market selloff triggered by fears of an AI bubble. The S&P 500 index has risen 16.1% on a year-to-date basis, while the tech-heavy Nasdaq 100 index has jumped 21.6% during the same period.
Reuters contacted at least half a dozen major hedge funds for comment on this story including Millennium Management, Citadel, and Bridgewater Associates. Millennium, Citadel and Bridgewater declined to comment.
LEVERAGE LEVELS ATTRACT SCRUTINY, CONCERN
Financial regulators ranging from the Federal Reserve to the Bank for International Settlements are scrutinizing the use of leverage by the most high-profile funds.
Leverage magnifies gains and losses, said Michael Oliver Weinberg, a hedge fund investor and special advisor to the Tokyo University of Science Endowment.
“If many of the large multi-strategy funds have the same trade on in size, an unwind would mean everyone running for the doors at the same time with few to take the other side of the trade. This can cause big market moves,” he said.
Over the past decade, leveraged strategies have become commonplace among funds, as they have grown at a much faster clip compared to the rest of the asset management industry. For years, the most prominent global multi-strategy funds, also known as “pod shops,” have borrowed money to take bigger swings at markets, as they juiced their returns from those bets.
According to data from Goldman, which compiles data based on client positions on their books, multi-strategy funds account for roughly one-third of the gross market value managed by hedge funds in equities, from overseeing $91 billion of assets in 2010 to about $428 billion in 2025.
While these multi-strats account for 10% of the total industry, the cohort trades as much U.S. stock as stock pickers, event-driven funds, and quantitative funds. This is because of their size and their “considerably higher” levels of leverage, Goldman’s prime brokerage unit said in a separate note.
Still, some bankers and industry experts are not overly concerned about current leverage levels, pointing out that debt-fueled bets have largely paid off so far. According to Morgan Stanley, global hedge funds have returned an average of just over 11% this year to the end of November.
Experts also pointed out that the top multi-strategy hedge funds typically have stringent risk management processes that help them navigate periods of market stress effectively.
“The thing to keep in mind about leverage… is that as the industry has continued to evolve, clients have gotten better at monitoring and hedging out certain risks, and farming out their liquidity,” Schlegel said.
(Reporting by Anirban Sen in New York and Nell Mackenzie in London; Editing by Megan Davies and Paul Simao)
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