Hedge funds are using near-record levels of leverage to trade equities and betting on
debt-backed strategies in efforts to juice returns, making the
most of markets buoyed by a boom in artificial intelligence.
Over the past few years, debt-fueled strategies have surged
as funds have become larger and more complex. That trend is
starting to raise concerns about whether the higher use of
leverage could expose them and the broader market to steeper
losses in the event of a correction.
“We are seeing leverage around historical highs on our
books,” said John Schlegel, head of positioning intelligence at
JPMorgan. “When you look at the amount of exposure relative to
liquidity in the markets, markets have gone up pretty materially
from pre-COVID to now – much faster than the hedge fund AUM
(assets under management) has.”
Data compiled by Goldman Sachs, JPMorgan and Morgan
Stanley, the largest global prime brokerages, show that
leverage used to bolster returns for traditional hedge funds
that go long or short on stocks is close to an all-time high and
continues to rise, depending on the bank. These reports were
sent in recent weeks to a restricted group of clients and seen
by Reuters.
Goldman’s prime brokerage data showed that in November, US
gross and net leverage for hedge funds across the board
increased. Hedge funds’ gross leverage globally, which includes
investor money and trading positions, sits at nearly three times
their books, or 285.2 per cent, up about 12.4 percentage points this
year to date, which is close to an all-time record, according to
Goldman’s data. That data means that for every $100 of capital
from investors, hedge funds on average had roughly $300 in long
and short positions. U.S. hedge fund stock pickers’ leverage
stood at a three-year high, Goldman’s data showed.
JPMorgan’s November-end data showed that gross leverage
levels have reached 297.9 per cent, the highest point in the last five
years and close to an all-time high. Quantitative and
multi-strategy funds’ leverage at the end of last month averaged
645.3 per cent and 444.3 per cent, respectively, the bank’s report said.
Morgan Stanley’s note, compiled by its prime brokerage team
and sent to clients on Dec. 1, shows gross leverage for U.S.
hedge funds at more than two times, adding that levels were
higher only 1 per cent of the time when tracked in the last 15 years.
Goldman and Morgan Stanley declined to comment beyond what
was contained in the reports.
Three hedge fund managers and one prime brokerage executive
told Reuters that when hedge funds offset buy and sell trades,
leverage offered by banks ranged higher. The hedge fund sources
said they received leverage levels of at least 10 times, which
is near a historical high. A short position bets that asset
prices will decline.
The rise in leverage levels has coincided with ongoing
bullishness among hedge funds across different strategies,
despite a recent market selloff triggered by fears of an AI
bubble. The S&P 500 index has risen 16.1 per cent on a
year-to-date basis, while the tech-heavy Nasdaq 100 index
has jumped 21.6 per cent during the same period.
“The month (of November) also saw the second-largest clip of
global equity buying this year, driven mainly by long additions,
which lifted both net and gross leverage and meaningfully
increased long-book concentration,” UBS said in a note to
clients on Nov. 27.
Reuters contacted at least half a dozen major hedge funds
for comment on this story including Millennium Management,
Citadel, and Bridgewater Associates. Millennium and Citadel
declined to comment, while Bridgewater did not respond to a
request for comment.
LEVERAGE LEVELS ATTRACT SCRUTINY, CONCERN
Financial regulators ranging from the Federal Reserve to the
Bank for International Settlements are scrutinizing the use of
leverage by the most high profile funds.
Leverage magnifies gains and losses, said Michael Oliver
Weinberg, a hedge fund investor and special advisor to the Tokyo
University of Science Endowment.
“If many of the large multi-strategy funds have the same
trade on in size, an unwind would mean everyone running for the
doors at the same time with few to take the other side of the
trade. This can cause big market moves,” he said.
Over the past decade, leveraged strategies have become
commonplace among funds, as they have grown at a much faster
clip compared to the rest of the asset management industry. For
years, the most prominent global multi-strategy funds, also
known as “pod shops,” have borrowed money to take bigger swings
at markets, as they juiced their returns from those bets.
According to data from Goldman, which compiles data based on
client positions on their books, multi-strategy funds account
for roughly one-third of the gross market value managed by hedge
funds in equities, from overseeing $91 billion of assets in 2010
to about $428 billion in 2025.
While these multi-strats account for 10 per cent of the total
industry, the cohort trades as much U.S. stock as stock pickers,
event-driven funds, and quantitative funds. This is because of
their size and their “considerably higher” levels of leverage,
Goldman’s prime brokerage unit said in a separate note.
Still, some bankers and industry experts are not overly
concerned about current leverage levels, pointing out that
debt-fueled bets have largely paid off so far. According to
Morgan Stanley, global hedge funds have returned an average of
just over 11 per cent this year to the end of November.
Experts also pointed out that the top multi-strategy hedge
funds typically have stringent risk management processes that
help them navigate periods of market stress effectively.
“The thing to keep in mind about leverage… is that as the
industry has continued to evolve, clients have gotten better at
monitoring and hedging out certain risks, and farming out their
liquidity,” Schlegel said.
Published on December 6, 2025
