Goldman Sachs: Major Short Covering! Hedge Funds Chase U.S. Stocks at Fastest Pace in Six Months

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The strong rally in US stocks continues, and hedge funds are entering the market at their most aggressive pace so far this year.

According to Bloomberg, Goldman Sachs’ prime brokerage division indicated in its latest client report that hedge funds’ net buying of US stocks last week reached a six-month high, with trading structures driven mainly by opening long positions and short covering, involving index products and ETFs. Meanwhile, short positions in US-listed ETFs have decreased for the second consecutive week, with a week-over-week decline of 0.6%.

Data from the latest week shows a significant increase in market risk appetite: the net leverage ratio of US stocks has risen to 55.3%, at the 89th percentile of the past year; the fundamental long-short ratio for US stocks has also increased by 1.4 percentage points from the previous week, now at the 99th percentile.

This positioning structure stands in sharp contrast to the defensive stance observed in late May. At that time, Goldman Sachs’ prime brokerage noted that hedge funds had taken profits in the semiconductor sector and increased macro-level short exposure amid rising bond yields and inflation data exceeding expectations.

From the market perspective, the S&P 500 index has risen for nine consecutive weeks, marking the longest weekly rally since 2023. The Nasdaq 100 index, dominated by tech stocks, has gained more than 20% year-to-date. Market sentiment continues heating up, indicating investors’ optimistic expectations on AI infrastructure spending, combined with an overall better-than-expected earnings season, are jointly supporting the current rally.

Strong Buying in Financial Stocks, Short Positions Accumulate in Industrials

In the current buying spree, financial stocks have benefited the most, with net buying reaching a six-month high. Data from Goldman Sachs shows the ratio of long buys to short sells is about 6.5 to 1, with purchases led by payment companies, followed by bank stocks, and selling in consumer finance and capital markets sectors providing a degree of hedging.

Despite continued capital inflows, Goldman Sachs points out that financial stocks remain deeply underweighted. “The total and net allocations of financial stocks in US main portfolios are both at the 1st percentile of their respective five-year lows,” the report states.

In sharp contrast to financial stocks, the industrial sector has seen net selling in seven of the past eight weeks. Goldman Sachs data shows that short exposure in industrial stocks has risen to the 90th percentile over the past year, and since February, selling has been driven mainly by short selling rather than closing long positions.

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