Hedge funds slash leverage at fastest pace since March amid October losses

Hedge funds drastically reduced leverage for the first time since March 2023, driven by heavy losses in October and significant selling of technology stocks, according to Goldman Sachs prime brokerage data. Both fundamental long-short equity funds and systematic strategies saw double-digit monthly declines in performance, marking the steepest monthly decrease in leverage in seven months.

Net leverage across Goldman Sachs' prime brokerage book dropped to 73.4%, reflecting a rapid de-risking of portfolios. Hedge funds were notable net sellers of global equities, outpacing short sales by four to one, with technology stocks alone accounting for approximately $20bn in sales over two weeks. The sharp decline in AI-related equities saw a cumulative net purchase of the sector erased over a two-week period.

Asia-focused hedge funds were particularly hard-hit, experiencing average monthly losses of 9.4%. While risk-taking in the market was curbed, trading activity revealed a targeted rotation of portfolios rather than indiscriminate selling. Information technology, industrials, and materials saw the largest outflows, while consumer discretionary, real estate, and healthcare attracted buying interest.

Hedge funds also shifted toward macro products and index instruments while trimming individual stock positions. Despite the industry-wide downturn, European equities remained relatively resilient, with hedge fund overweights in the region reaching a one-year high of 3.5%. Major European markets, including the UK, France, and Spain, saw heightened interest from hedge funds.