Hedge funds are using more leverage than they have in years to try to boost returns. This is happening as stock markets continue to rise, helped in part by growth linked to artificial intelligence. Large banks that work closely with hedge funds say leverage levels are now close to recent highs.
According to Goldman Sachs, hedge funds globally now hold close to three dollars in market positions for every dollar their investors put in. JPMorgan reports even higher levels, saying leverage is at its highest point in five years. Morgan Stanley adds that many U.S. hedge funds are now taking on borrowing levels that are rarely seen.
Some funds go much further. By balancing long and short positions, managers can push overall exposure to many times their capital. Quantitative hedge funds tend to use especially high levels. Large multi-strategy funds also rely heavily on borrowing despite having a smaller share of total hedge fund assets.
So far, the strategy has paid off. Hedge funds have posted solid gains this year, and major stock indexes like the S&P 500 and Nasdaq have risen sharply. Strong markets have made it easier for funds to manage risk and absorb swings in prices.
Regulators are watching closely. Using more leverage can increase profits, but it also makes losses happen faster when markets fall. There is concern that if too many funds rush to exit the same trades, markets could move suddenly. Banks say large funds are acting cautiously. Many use strict risk limits, active hedging, and careful cash planning to help them stay positioned if market conditions shift.