According to data revealed by two investment banking sources quoted by the media, as well as recent customer reports released by major commercial banks on Wall Street, the level of leverage currently used by hedge funds in global stock trading with US stocks as the main body is close to a record high. Due to the recent surge in the scale of borrowing strategies, the bullish market conditions of the US stock market, and the shift in the overall environment of the financial market towards easing, have all contributed to the increase in the risk asset betting scale of hedge funds.

According to relevant data reported by clients, the latest data compiled by the world's top three institutional brokers Goldman Sachs (Goldman Sachs), JPMorgan (JPMorgan), and Morgan Stanley (Morgan Stanley) shows that leverage ratios used to increase return on investment in the stock market have reached or are close to historical highs, depending on the individual statistics of commercial banks.

In recent years, hedge funds' use of leverage has drawn more attention from regulators to its possible impact on portfolios, markets, and banks. For example, the Federal Reserve's annual bank health check program will begin testing banks' response to the bankruptcy of large hedge funds, while the US Securities and Exchange Commission (SEC) will require hedge funds to provide more detailed and regular risk exposure disclosure data.

“Leverage in the macro (hedge fund) sector is definitely high,” said John Delano, managing director of Commonfund, which invests in hedge funds. He also said that the smooth progress of global central banks in reducing inflation and investors' confidence in artificial intelligence to trigger major changes in productivity have greatly contributed to this leveraged trend.

According to a Goldman Sachs data report, the current leverage ratio of hedge fund stock positions is almost 3 times their book value, compared to about 2.35 times a year ago, and is currently at a record level of the past 5 years. Goldman Sachs usually uses the time period of the past 5 years for hedge funds as a reference period for comparison.

Goldman Sachs statistics show that for every $100 of its own capital invested by a hedge fund, it generates up to $300 in long and short positions.

According to JPMorgan (JPMorgan) statistics, the current leverage usage rate is about 2.7 times, close to the peak since 2017. In the tracking time since then, the general usage rate of leverage has exceeded 98%, and the current leverage ratio is much higher than this level. The Morgan Stanley report shows that in the leverage tracking data for the past 14 years, the current leverage ratio of hedge funds in the US stock market is only higher than 2%.

Hedge funds with different strategies almost agree on US stocks: after a bullish market

According to data compiled by the agency, at a time when the leverage ratio of hedge funds was rising, hedge funds became more bullish after the US stock market began a new round of gains at the end of October last year. At that time, investors began to bet that the Federal Reserve would soon cut interest rates. Since then, the benchmark index for US stocks, the S&P 500 (S&P 500), has risen about 24%.

Barclays Bank pointed out in a report that hedge funds with different strategies almost agree on US stocks; that is, they are bullish on the future market. Global macro-type hedge funds are currently taking long positions in the US stock market after removing the short positions they have continued to hold for a year, while systemic hedge funds are shorting different benchmark stock indices. Barclays Bank added that the so-called Commodity Trading Advisory Fund (CTA) stock long positions “remain tight.” In a general sense, a CTA strategy is a fund that uses computer quantification techniques to track price trends.

Mario Unali, senior portfolio manager from Kairos Partners, said: “This leveraged trend shows that the market thinks the trend is very good.” Unali said that in the past three years, he has observed that the level of leverage in systematic hedge fund strategies (that is, strategies that use data-based computer quantitative models to trade) reached the highest level in these three years.

According to J.P. Morgan's forecast data, traditional hedge funds mainly go long or short on stocks based on historical performance data and technical analysis. The leverage ratio is about twice the book value, while the leverage ratios of stock quantification and multi-strategy hedge funds are as high as 4.5 times and 3.1 times, respectively.

According to information, since 2014, leveraged strategies have become more and more popular among investors, and the scale of leveraged strategies has even surpassed the asset growth rate of the entire industry. According to tracking data from hedge fund research firm PivotAlPath, multi-strategy and quantitative investments currently account for about 32% of the entire hedge fund market, compared to about 24% in 2014.

However, these strategies are generally considered relatively low risk because they tend to match long and short positions, and are therefore less affected by stock market ups and downs.

So far, betting on the US stock market with higher leverage, and the continued rise in the broader stock market seems to have paid off very positively. According to Goldman Sachs statistics, the asset value of stock hedge funds using a systematic strategy increased by 6.42% in the first two months of this year, completely exceeding the increase in MSCI's global benchmark stock index.

Edoardo Rulli, chief investment officer of UBS Hedge Fund Solutions (UBS Hedge Fund Solutions), said that the current level of leverage is still operational and is not one of his biggest concerns, mainly due to the relatively low volatility of the market.

However, he is still watching the matter closely. “Leverage has always been an issue, so monitoring leverage is key. If you add the risks associated with liquidity, this could be a fatal crisis.”

Can't the S&P 500 Index stop rising? Bank of America called out 5,400 points; Barclays Bank expects the highest possible rise to 6050 points

The fanaticism brought about by artificial intelligence and the resilience of the US economy surprised Wall Street forecasters and prompted strategists to compete to keep up with the stock market rebound that had exceeded their expectations. In recent weeks, Piper Sandler, UBS, and Barclays have all raised their S&P 500 outlook. Goldman Sachs Group and UBS Group have raised their expectations for the US economic outlook twice since December of last year, after the Federal Reserve switched to dovish policies.

Under the impetus of AI chip giant Nvidia (NVDA.US)'s extremely strong performance and performance outlook for many consecutive quarters, the stock prices of US tech giants rose rapidly, and these highly weighted tech giants have driven the S&P 500 index to new highs this year. The bears that shorted “Magnificent 7” targets such as Nvidia seem to have disappeared. Meanwhile, Wall Street investment institutions, as well as well-known hedge funds and retail investors, have increased their allocation exposure to Nvidia and many other technology stocks.

Since this year, the benchmark stock index for US stocks, the S&P 500 index, has risen by more than 8%, and has repeatedly reached new highs since this year, continuously breaking new all-time highs, mainly driven by the market's investment frenzy surrounding artificial intelligence and expectations that the Federal Reserve will cut interest rates this year. As of Monday's close of the US stock market, the S&P 500 index closed at 5117.94 points.

Piper Sandler strategist Michael Kantrowitz can be described as Wall Street's most bearish strategist on the US stock market in 2023. Recently, he raised his S&P 500 forecast to 5,250 points. This expectation surpassed the predictions of some bullish Wall Street peers such as John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, and Thomas Lee, head of research at Fundstrat Global Advisors — both of whom expect the S&P 500 to hit 5,200 points by the end of the year.

Star strategist Savita Subramanian from Bank of America expects the S&P 500 index to reach 5,400 points by the end of the year, while the target point she gave before that was 5,000 points. The strategist said that various technical indicators are flashing bullish signals, indicating that future profit growth will be even stronger and profit margin elasticity is “surprising”.

Furthermore, Bank of America strategists such as Subramanian raised the agency's overall earnings forecast for S&P 500 companies from $235 to $250 in the latest research report, making it the most optimistic profit forecaster on Wall Street, along with BMO Capital Markets and Deutsche Bank. Additionally, Bank of America expects earnings per share to reach $275 in 2025.

Barclays Bank can be described as Wall Street's most optimistic investment institution for the US stock market. The agency's year-end target price for the US stock benchmark index, the S&P 500 index, was raised sharply from 4,800 points to 5,300 points, mainly because it is expected that US stocks will continue to benefit from the rich profit data of large technology companies and the excellent performance of the US economy beyond the expectations of the market. Barclays also pointed out in the report that if the profit data of large technology companies continues to exceed expectations, then the agency believes that the S&P 500 index may reach 6050 points by the end of this year.

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