Having been violently whipsawed in the past 3 months by soaring market volatility, and having notched only mediocre returns in recent months, analysts had assumed that hedge funds had substantially taken down their leverage especially now that traditional, momentum-chasing strategies no longer work. It turns out that nothing could be further from the truth.
According to the latest JPM Prime Finance portfolio update, Gross Leverage for the aggregate cash and synthetic Prime Finance portfolio rose +1.34% last week (Table 1) and is now at the highest level since 2014. As further shown, only Convertible bond Arb, High Grade Fixed Income and to a small extent, Market Neutral funds showed a decline in gross leverage in the past week.
Some more observations:
For traditional, Equity Long/Short funds, gross leverage rose by +0.98% while net exposure fell by -0.50% (Fig. 2). Gross and Net Leverage are close to the highest since Jan 2012.
For Equity market neutral funds, gross leverage fell by -0.14% while net exposure fell by -2.13% (Fig. 3). The gross leverage is now also close to highest since Jan 2012 while the net is close to median since Jan 2012.
Looking at North American sentiment expressed by hedge funds, the Long/Short Ratio of the US equities book weakened over the past week (Fig.4) to its 33rd percentile YTD.
Net selling WoW was in the top 5th percentile YTD (Fig.5) driven by sharp increase in short selling (highest WoW YTD)
Finally, a look at sector positioning is revealed in the following charts of YTD trading activity across all NA sectors. Financials saw strong WoW buying while Info Tech and Materials saw strong WoW selling; Meanwhile, most inexplicably, energy selling continues despite WTI rising to just shy of $70.