Hedge fund short leverage hits 99th percentile of range

Hedge funds' short leverage reached the 99th percentile of its five-year range this month, with short selling outpacing long buying about five to one, according to Goldman Sachs prime brokerage data cited by Hedgeweek.

Bearish equity positioning sits close to a five-year high, the report published Oct. 23 said. Net leverage among fundamental long-short managers fell near a three-year low even as gross leverage rose, leaving larger books on both sides with a small net.

For allocators, the numbers describe crowding rather than a hedge: a low net number can sit on top of the same crowded short as every other manager's. Net exposure to the Magnificent Seven reached a record high even as managers sold technology more broadly, the report said, so a book that looks defensive at the index level may still be concentrated in the biggest technology names. The diligence question is where the short exposure actually sits and how much of it depends on the same handful of positions unwinding in the same direction.

Global information technology stocks recorded their largest two-week net selling since Goldman began tracking the data more than a decade ago, in the two weeks to Oct. 16, according to the report. Net allocation to Goldman's global AI stock basket fell to the 38th percentile of its one-year range, and the long-short ratio in that basket dropped to the 6th percentile.

Goldman flagged the possibility of a short squeeze, saying crowded bearish positioning leaves funds vulnerable to a sudden recovery in equity prices. Persistent inflation concerns and uncertainty over AI investment returns continue to weigh on sentiment, the report said. A fund running its short book at the top of a five-year range has less margin for error if the trade reverses. The positioning data gives a dated reference point — the Oct. 16 cutoff for technology selling and Goldman's Oct. 23 read — against which to test what a manager says about its net and gross exposure at the next reporting date.