Hedge funds have pulled back somewhat on gross leverage from previously recorded highs, yet leverage levels remain close to those peaks, according to a team of strategists at Goldman Sachs led by Ben Snider. At the same time, hedge funds are moving positions between sectors at the most rapid clip observed since 2021.
The strategists note that short interest in the median S&P 500 stock is near the highest levels seen in recent years. Short positions are particularly concentrated in defensive stocks and among smaller-capitalization companies, a pattern the team flagged as notable.
Portfolio concentration and crowding across hedge fund holdings also run above historical norms, the report adds, indicating that many funds hold large, overlapping positions rather than broadly diversified baskets.
Rotation dynamics have favored cyclicals this year, a shift that has helped drive hedge fund returns. Specifically, funds have increased overweight positions in energy, materials, and industrials over the last quarter - sectors the strategists identify as the top year-to-date performers.
Within long portfolios, asset allocation has shifted from software toward semiconductors. Hedge funds lifted semiconductor exposure to roughly 9% of long portfolios, surpassing software's 7% weight for the first time since 2018, the report says. That reallocation reflects fund managers' growing preference for chipmakers over software names in the current cycle.
The report lists the most popular hedge fund long positions for the quarter, with Boeing and GE Vernova joining Goldman’s hedge fund VIP list of frequently held longs. Separately, Cleveland-Cliffs, Eaton, ITT, and Sealed Air were identified as rising stars - stocks that saw the largest increases in popularity among hedge funds.
In the semiconductor space, Applied Materials, Micron, Nvidia, and Teradyne are noted as rising stars, reflecting the sector's increasing share of long-book weightings. Conversely, Salesforce and Docusign were classified as falling stars, indicating a decline in hedge fund popularity during the period covered.
The Goldman Sachs strategists' observations highlight three simultaneous trends: leverage remaining elevated despite reductions, elevated short interest concentrated in defensive and smaller-cap stocks, and a swift sectoral rotation that has favored cyclicals and semiconductors. These elements combine to create a distinct hedge fund positioning profile going into the next reporting period.