Hedge funds reduce risk

According to data from Goldman Sachs and Morgan Stanley, hedge funds are experiencing a significant decline in risk appetite. Data compiled by Goldman Sachs earlier this month showed that the leverage indicator, which takes into account hedge funds’ long-short positions, fell 20 points to 66 percent, the lowest level in a year. Separate data compiled by Morgan Stanley also showed that the net leverage of US long-short equity hedge funds fell by a similar amount to 41 percent. This data, seen by Bloomberg, is also an important indicator for the sector as a whole. According to the latest rankings released by research firm Convergence, Goldman Sachs and Morgan Stanley are the world’s two largest brokerage firms serving more than 5,000 hedge funds. On the other hand, officials from two other brokerage firms who spoke to Bloomberg but did not want their names to be disclosed said that the risk reduction stemmed from defensive positioning due to the increase in interest rates and the selling pressure in the markets. Charles Lemonides, CIO of Valueworks, a New York-based hedge fund, said hedge funds “want to make sure they’re not approaching levels that would force them to sell.” “The fact that the market continues to decline will at some point highlight this,” he said. “Every month that the Fed says it’s going to tighten, we realize more and more that we could be in for one of these big liquidity-based sell-offs,” he said. Meanwhile, hedge funds’ positions in U.S. junk bonds rose to 14.5% from 12.5% last year, the highest since the start of the pandemic, while pension funds’ positions in high-yield U.S. bonds have fallen more than 20% this year.