A New Record in Leverage is Being Set by Hedge Funds by Shorting Stocks Again

Hedge funds have pushed their borrowing to unprecedented levels, driven by a substantial rise in short positions, particularly in the financial and biotech sectors, according to data from Goldman Sachs. The bank’s latest hedge fund trend monitor, released Tuesday, revealed that this increase in short exposure has significantly boosted gross leverage across the industry.

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Gross leverage refers to the amount of borrowed capital hedge funds use to amplify their investment returns. This figure has now reached a record high, mainly because of a sharp escalation in bearish bets on various securities. Goldman Sachs noted that the most intense shorting activity was concentrated in financial stocks and biotechnology names.

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Short selling involves borrowing a stock and selling it immediately with the intention of buying it back later at a lower price. This strategy profits from a decline in the stock’s value, but it also adds risk and volatility to a fund’s portfolio.

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In recent months, hedge funds have amassed considerable short positions in both individual stocks and exchange-traded funds (ETFs). According to Goldman Sachs Prime Services, hedge funds held $218 billion in short positions in ETFs and $948 billion in individual stocks. Notably, April saw the largest one-month increase in ETF short selling in over a decade.

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Among the ETFs seeing the most dramatic increases in short interest were the SPDR S&P Regional Banking ETF (KRE), which focuses on regional financial institutions, and the SPDR S&P Biotech ETF (XBI), which targets the biotech industry. Short interest in KRE surged by 50 percentage points from mid-February to the end of April, while XBI saw a 27-percentage point jump during the same time frame.

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This pattern of aggressive shorting is not limited to ETFs. Hedge funds have also been heavily shorting individual stocks. For the first time since 2021, the average short interest in S&P 500 companies has risen above its long-term historical norm. Currently, the median short interest is 2.3% of the market’s float, up from 1.8% at the end of 2024. This indicates that bearish sentiment among professional investors is becoming more widespread.

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Despite heightened market volatility in recent months — particularly following what has been dubbed “Liberation Day” — long/short equity hedge funds have managed to stay in positive territory for the year. These funds, which combine both bullish (long) and bearish (short) strategies, have posted an average year-to-date return of 1%. Much of this performance has been attributed to strategic stock selection, rather than broad market movements.

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Goldman Sachs also tracks a proprietary basket of the most popular long positions among hedge funds, known as the GVIP (Goldman Sachs Hedge Fund VIP List). This collection of widely held names has returned 6% so far in 2025, handily outperforming the broader S&P 500 index.

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Liquidity remains a top priority for hedge funds, which helps explain the dominance of large-cap tech names among their favorite long positions. Stocks like Amazon, Meta Platforms, Alphabet, Microsoft, and Nvidia continue to top the list of most popular holdings. These companies offer high liquidity and consistent trading volume, making them attractive options for funds that may need to enter or exit positions quickly.

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At the start of the second quarter, hedge funds were heavily tilted toward cyclical stocks — those that tend to perform well during periods of economic growth — over more defensive sectors like utilities and consumer staples. This positioning has paid off, as cyclicals have outperformed defensives by 11% since April. Hedge funds have taken advantage of this divergence to enhance their returns.

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Interest in stocks linked to artificial intelligence has also remained strong. Roughly 12% of hedge funds continue to hold shares in companies that are directly or indirectly tied to AI development. This exposure has proven beneficial, as the AI sector has outpaced the broader S&P 500, contributing positively to hedge fund performance.

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In summary, hedge funds are aggressively increasing their use of leverage through rising short positions, particularly in ETFs and sectors facing potential headwinds. At the same time, well-executed long positions — especially in high-liquidity tech and AI-focused names — have helped maintain solid performance in 2025. While short interest is at multi-year highs, the selective approach to stock picking and a favorable tilt toward outperforming sectors have allowed many funds to navigate the complex market landscape successfully.

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