Hedge funds are shorting stocks again, boosting leverage to new record

Hedge fund gross leverage has reached a record high, driven by a significant increase in short positions, particularly in financials and biotech, with substantial short exposure to ETFs ($218B) and stocks ($948B). Goldman Sachs observed the largest monthly increase in ETF short-selling in over a decade, with the S&P Regional Banking ETF and S&P Biotech ETF experiencing spikes of 50 and 27 percentage points, respectively. Despite increased shorting, long/short funds have maintained a 1% year-to-date return, benefiting from strong performance in popular long positions, especially in AI-exposed stocks and cyclical sectors.

Analysis

Hedge fund gross leverage has reached a record high, primarily driven by a substantial increase in short positions on stocks, according to Goldman Sachs data. This surge in shorting activity is particularly concentrated in the financials and biotech sectors, with short interest in the S&P Regional Banking ETF spiking by 50 percentage points and the S&P Biotech ETF by 27 percentage points between February 14 and April 30. Hedge funds' short exposure now totals $218 billion in ETFs and $948 billion in individual stocks, marking the largest monthly increase in ETF short-selling observed by Goldman Sachs Prime Services in over a decade. Reflecting this trend, the median short interest in the S&P 500 has risen to 2.3% of market float, surpassing the 1.8% level seen at the end of 2024 and exceeding its long-term historical average for the first time since 2021. Despite this bearish positioning in certain areas, long/short funds have managed an average year-to-date return of 1%, largely due to effective stock selection. Notably, Goldman's list of most popular hedge fund long positions—including Amazon, Meta, Alphabet, Microsoft, and Nvidia—has returned 6% year-to-date in 2025, significantly outperforming the S&P 500. This outperformance is partly attributed to a decade-high weighting in cyclical stocks entering the second quarter, which have outperformed defensives by 11% since April, and sustained investment in AI-exposed stocks, with 12% of funds holding such positions that have outperformed the broader market.

Key Decisions for Investors

• Investors should closely monitor the record hedge fund leverage and the significant build-up of short positions, particularly in regional banking and biotech, as these signal heightened skepticism and potential for increased volatility in these sectors.
• Despite the rise in short selling, consider that strategic long investments in high-liquidity, fundamentally strong companies, especially within technology (e.g., AMZN, META, GOOGL, MSFT, NVDA) and AI-related themes, continue to demonstrate outperformance and attract hedge fund capital.
• Given the divergence between aggressive shorting in specific sectors and robust performance in favored long positions, investors may need to adopt a nuanced strategy, preparing for sector-specific downturns while identifying ongoing strength in growth-oriented segments.