(HedgeCo.Net) The global hedge-fund industry is showing a bold turn: leverage has surged to its highest level in five years. According to data from Goldman Sachs, gross leverage among hedge funds rose to roughly 294 % recently — up from about 271.8 % at the start of 2025. Reuters
Why the surge? Several factors appear to be converging:
- With interest rates holding steady in the U.S., hedge-fund managers seem more confident in layering on exposure. The referenced data came when the Federal Reserve held rates and geopolitical risk raised concerns about oil and supply-chain risks. Reuters
- Funds have been particularly active in financial stocks — banks, trading firms, insurance companies — presumably as they anticipate benefits from higher rates or market stress scenarios. Reuters
- Rising market dispersion (i.e., stocks moving more independently of each other) gives active managers more space to deploy leverage, finding idiosyncratic opportunities. Callan+1
But the elevated leverage also comes with risk. When funds use higher gross exposure (i.e., sum of longs plus shorts), small market shocks can magnify losses. Some of the more trend-following hedge funds have already been flagging underperformance this year, meaning leverage could amplify pain. Reuters+1
Implications:
This trend suggests that hedge funds believe they can “earn for risk” in the current volatile regime. It also indicates that banks and financials are being viewed as a favorable sector by active managers. For investors, higher leverage means higher potential returns but also greater downside. It could amplify drawdowns if markets turn.
Bottom line:
The leap in leverage signals a renewed confidence among hedge-fund managers, but with markets remaining choppy and unpredictability high, this is a double-edged sword.