Hedge funds continue to increase leverage! Bank of America’s stock financing positions hit a record high, analysts warn: liquidity risks are accumulating.

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Although volatility in US stocks has increased recently, institutional investors’ demand for leveraged funds has not cooled down.

Bloomberg macro strategist Simon White pointed out that bank equity repo positions have recently hit new record highs, indicating that hedge funds are still actively increasing their equity leverage exposure, rather than the active deleveraging previously feared by the market.

However, continued accumulation of leverage also means that market vulnerability is rising. Once stock financing rates climb rapidly or banks’ balance sheets become congested, leveraged funds may pull out en masse, further amplifying stock market corrections.

Bank Equity Repo Positions Continue to Rise

Simon White noted that since the beginning of June, bank equity repo positions have been steadily rising, now reaching new record highs.

Equity repo financing is an important channel for hedge funds and leveraged ETFs to obtain leverage. Leveraged ETFs mainly gain amplified equity exposure by signing total return swaps (TRS) with banks.

Historical data show that the total market value of US leveraged equity ETFs and the trend of bank equity repo positions are highly consistent, reflecting a close relationship between bank balance sheet expansion and market demand for leverage. However, the two have recently begun to diverge. The scale of leveraged ETFs has fallen back slightly, and from the perspective of capital flows, their weekly net inflows are near zero, signaling that new demand for leverage via ETFs is cooling down.

Hedge Funds Lead the Demand for Leverage

In sharp contrast to leveraged ETFs, hedge fund demand for equity leverage continues to increase.

Simon White found, by analyzing hedge fund yield sensitivity to the S&P 500 Index, that the indicator has been rising continuously since the start of this year, with the increase most pronounced among long/short equity strategy funds. This means such funds are steadily raising their equity positions and have become the main driving force behind record highs in bank equity repo positions.

Meanwhile, stock financing rates have recently fallen, and banks remain willing to provide leverage, creating favorable financing conditions for hedge funds to further increase leverage.

Financing Costs Remain the Largest Risk Variable

Although the current financing environment is still loose, Simon White cautions that historical experience shows that stock financing rates often rise rapidly in a short period. Once financing costs spike, high-leverage strategies may be forced to quickly close positions, provoking wild asset price swings.

In addition to financing rates, he believes swap spreads also deserve close attention. If bank balance sheets start to become congested, swap spreads usually decline first, indicating banks’ ability to provide leverage is falling—an important early warning signal of liquidity tightening.

For the market, as hedge funds continue to accumulate leverage, risks may remain controllable as long as the financing environment stays loose; but if both financing costs and bank liquidity change at the same time, deleveraging could rapidly act as an amplifier for market corrections.

Risk Warning and DisclaimerThe market has risks, investment needs caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Invest accordingly at your own risk. ```