Leverage hits four-year high, short positions set record—three major warning signals in the June market

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The narrative around artificial intelligence remains strong, but the market structure has quietly changed. Goldman Sachs’ Chief Analyst for Fund Flows, Lee Coppersmith, warns that the current market is carrying higher long positions and higher leverage levels, making the risk of volatility impossible to ignore.

According to Goldman Sachs prime brokerage data, global hedge fund net leverage has risen to a four-year high, and the increase over the past four weeks is the steepest in nearly five years, driven by large-scale net buying activity and the daily mark-to-market enrichment of positions. Meanwhile, the implied volatility of mega-cap tech stocks continues to expand, with premiums relative to the broader market rising even as stock prices climb.

The oil market is also showing signals worth attention. Due to the impact of the Iran agreement, managed money has net sold around $25 billion of crude oil over the past seven weeks, and Brent’s geopolitical premium has been almost entirely given back. Thanks to record short building last week, net long positions in the oil market have fallen below pre-war levels. At the same time, the hawkish stance of the Federal Reserve has replaced geopolitical factors as the new source of uncertainty, triggering a repricing of front-end rates.

"June is a reminder," wrote Lee Coppersmith, "even the strongest long-term themes do not trade in a vacuum." He emphasizes that AI remains the top long-term investment conviction among clients, but structural risks within the market are accumulating in parallel.

Leverage surges, market structural pressure intensifies

The most noteworthy change within the market is not fundamentals, but the market structure itself.

Goldman Sachs prime brokerage data shows that global hedge fund net leverage has reached a four-year high, and the slope of this current rise is particularly steep—the increase over the past four weeks is among the largest single-period increases in five years. This trend is driven by two forces: net buying from active position adding and mark-to-market enrichment of existing positions as the market rises.

Alongside leverage, volatility of mega-cap tech stocks relative to the broader market is structurally expanding. Lee Coppersmith points out that even as stock prices continue to rise, volatility premiums in the tech sector are still widening, which means the market is starting to price in higher risk premiums for structural vulnerabilities.

His conclusion spotlights the internal contradiction of today’s market: heavier long positions, higher leverage, and rising volatility have become a systemic inevitability, rather than a random event.

Oil market shorts hit records, macro risks return to pricing framework

Another main theme in June is the return of macro risks and a shift in the pricing framework.

The implementation of the Iran agreement has effectively digested a potential inflation risk, and Brent has almost given back all of its previous geopolitical premium. Managed money has net sold about $25 billion of crude oil over the last seven weeks, and after a record short build last week, short positions have reached historic highs, while net long positions have fallen below pre-war levels. Lee Coppersmith cites Rob Quinn's observation: investors are digesting geopolitical risks exceptionally quickly, and attention has rapidly turned to interest rates and Federal Reserve policy.

However, the fading of geopolitical premiums does not mean the reduction of macro pressures. The hawkish stance of the Fed's FOMC statement pushed front-end rates to be repriced higher and reignited uncertainty around policy paths. Lee Coppersmith specifically names nonfarm payroll announcement days and FOMC meeting days as classic examples, advising the market to calibrate event-driven volatility premiums more cautiously.

AI rotation deepens, Mag 7 exposure falls to a year low

Although market structure is tightening, the investment logic for AI itself has not wavered—but the way capital is being allocated is quietly evolving.

This week, the core question Lee Coppersmith discussed with clients was no longer “Is AI peaking?” but “How should we hold AI exposure?” Goldman Sachs data show US and Asian capital expenditure expectations remain high, earnings forecasts continue to be revised upwards, and fund inflows into the US tech sector have remained robust for several weeks.

Notably, capital is shifting deeper from the Mag 7 to the broader AI ecosystem. Goldman Sachs prime brokerage data shows that both long and short exposures to the Mag 7 have fallen to a one-year low, while the overall US tech sector exposure is near a five-year high. Flows are focusing on semiconductors and Asian chip manufacturers—semiconductor sub-sectors are expected to be the most heavily net bought industry globally for the second consecutive year, with net allocation levels reaching historic highs.

Some capital is also spreading into financials, cyclicals, and Euro-Asian markets, but this expansion is occurring without sacrificing AI allocations.

Leveraged ETFs as volatility amplifiers, especially in South Korea

Systemic factors are playing an increasingly critical role beneath the surface of market volatility.

Lee Coppersmith specifically points out a data point: in markets such as Korea, demand from market makers for gamma rebalancing of leveraged ETFs can exceed 20% of daily average overall market volume on days of significant volatility. This means that the mechanical rebalancing of leveraged ETFs itself has become a structural source both amplifying upward momentum during rallies and increasing downward volatility.

This mechanism, combined with high fund leverage, constitutes the underlying logic of the current expansion in volatility: as stock prices rise, these two forces simultaneously increase risk exposure; if the direction reverses, the same mechanism accelerates both ways.

Lee Coppersmith's final assessment is that the AI long-term logic remains unchanged, and capital continues to flow in. But the June market performance clearly demonstrates that when a powerful narrative encounters high leverage structures, concentrated positions, and systemic amplification mechanisms, even without a change in fundamentals, volatility will become the norm.

Risk Disclosure and DisclaimerThe market carries risks, and investments require caution. This article does not constitute personal investment advice and does not take into account the special investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their particular circumstances. Investment based on this is at your own risk. ```