Contrary to public opinion that hedge funds have not participated in the recent rally, the latest hedge fund tracker from Goldman reveals that hedge funds boosted returns by keeping net leverage elevated throughout the market rebound. In fact, aggregate hedge fund net leverage calculated based on publicly-available data registered 54% at the start of 2Q 2020 and 50% at the start of 3Q, above the historical average.
Exposures calculated Goldman Sachs Prime Services show an even more acute dynamic, with hedge fund net leverage declining only modestly in Q1 as the market plunged, then sharply rebounding and today registering at levels that in recent years have only been exceeded following the passage of the TCJA tax cuts in late 2017-early 20. GS Prime Services data show net leverage ranking in the 95th percentile of the past five years, while gross leverage has slipped to the 68th percentile.
What we find even more remarkable however in the latest Goldman data, is that S&P 500 short interest has fallen to the lowest level in at least 15 years as funds lifted net length while cutting gross exposure. At the start of August, the median S&P 500 stock had outstanding short interest equating to just 1.8% of market cap, the lowest level in Goldman's 16-year data history. In most sectors, short interest outstanding currently ranks in the bottom decile of the last 15 years, with only Energy sector shorts registering above the historical average.
Of course, this means that hedge funds now "hedge" only in name, as most have become glorified vanilla long-onlines, although in a world where central banks step in to rescue the market after even a modest decline - acting as the market's Chief Risk Officer as we pointed out all the way back in 2013 when we said that the best strategy is to go long the most shorted stocks - who can blame them for throwing caution to the wind and going all in the most popular momentum names? After all, if there is another crash, it is now widely accepted that the Fed will step in again, this time by purchasing either ETFs or single name stocks outright.