Hedge Fund Leverage Climbs to Five-Year High Amid Market Turbulence, Goldman Sachs Reports

Hedge fund leverage surged to its highest level in five years last week, according to data from Goldman Sachs (GS.N), with investors increasing their bets on financial firms and energy stocks ahead of geopolitical unrest and in the wake of steady U.S. interest rates.

Gross leverage—a key indicator of how aggressively hedge funds are trading—rose to approximately 294%, marking its highest point since 2020. This compares to a leverage level of 271.8% at the start of 2025, Goldman Sachs’ prime brokerage data revealed in a client note.

The uptick in risk exposure came as the U.S. Federal Reserve opted to leave interest rates unchanged last Wednesday, signaling no urgency to initiate cuts. “The Fed held interest rates steady on Wednesday last week and indicated they were in no rush to cut interest rates,” the Goldman note observed.

Just days after the Fed’s decision, geopolitical tensions flared when the U.S. launched attacks on Iranian nuclear sites on Saturday. The strikes triggered a surge in oil prices, which on Monday edged toward their highest levels in a year. Market participants now brace for further gains, amid mounting fears of Iranian retaliation—particularly over a potential closure of the Strait of Hormuz, a vital chokepoint through which around 20% of the world’s crude oil supply flows.

Against this volatile backdrop, hedge funds made notable shifts in their geographic exposures. The Goldman Sachs data indicated a sharp increase in short positions on European and Asian equities, while funds remained “modestly long on North American stock.” The note clarified, “A short position expects a stock price to fall, whereas a long position bets it will rise.”

Financial stocks emerged as a focal point for hedge fund investors. Sectors such as banking, insurance, and trading companies experienced robust buying activity, particularly in North America and Europe. The Goldman note highlighted: “Financial stocks including banks, insurance companies and trading firms featured as one of the most popular stock sectors last week.” This is not surprising given that the balance sheets of financial institutions, especially banks, tend to benefit from elevated interest rates. “Banks collect payments when they lend money to corporates and consumers,” the note added.

While hedge funds were net buyers of financial firms’ equities in Western markets, they maintained a “slight short” in similar stocks across Asia, the data showed.

Additionally, the energy sector drew net long positions from hedge funds by the week’s close, likely in anticipation of oil price volatility driven by geopolitical tensions.

Performance-wise, hedge funds have enjoyed strong returns this year. “Global stock picking returns ticked up over 4 per cent so far this year, with returns in Europe surpassing 10 per cent,” Goldman Sachs noted. Systematic strategies have also fared well, with global systematic returns reaching nearly 12%.

The confluence of steady interest rates, sector-specific tailwinds, and escalating geopolitical risk appears to be driving a renewed appetite for leverage and tactical positioning among hedge fund managers worldwide.

By fLEXI tEAM