'Did they know about the US airstrike on Iran in advance? Surprise in Hedge Fund Investment Records [Global Money X-File]'

Leverage at a 5-Year High

Last week, the global hedge fund leverage scale reached its highest point in the past five years. Analysis of their investment details suggests that hedge funds may have anticipated the US airstrike on Iran.

According to Reuters on the 24th, Goldman Sachs reported that hedge fund leverage reached a five-year high last week (June 16–20). The prime brokerage division at Goldman Sachs regularly compiles hedge fund position data, tracking the long (buy) and short (sell) positions and leverage levels of major global hedge funds.

This data is based on transactions facilitated by brokers trading through Goldman Sachs. Because it is based on multiple hedge funds' trading records, it serves as a key indicator of capital flows in the global hedge fund industry. Goldman Sachs is one of the world's largest prime brokers, handling transactions for many major hedge funds.

However, this data only reflects the positions of funds that trade with Goldman Sachs, and thus does not represent the entire industry. Still, considering the significant funds with substantial market influence tend to diversify brokers, the Goldman Sachs data is widely regarded as a useful indicator to read prevailing hedge fund investment trends.

According to Goldman Sachs data, total hedge fund leverage in the third week of this month reached 294%. This is a steep increase from the 271.8% at the start of the year. This figure can be seen as an indicator of confidence in the market outlook. Typically, hedge funds increase leverage when they have a strong conviction about the market direction, though higher leverage also means greater gains or losses depending on market swings.

Looking at the investments specifically, hedge funds strategically adjusted positions by sector and region. They maintained a net long (bullish) position on North American equities, while increasing short (betting on decline) positions on European and Asian equities, resulting in a net short stance there.

This indicates a more positive stance toward the US, while in contrast, many funds bet on declines in European and Asian markets. For North American stocks, hedge funds maintained only a modest net long position, while European and Asian stocks saw an increase in shorts and thus turned net short overall.

Such regional divergence reflects hedge funds' macro outlook and perception of risk. The net buying in US stocks reflects the belief that the US market is relatively resilient or defensive, while the net shorting of European and Asian equities signals perceived downside risks in those markets.

By sector, there were marked increases in long positions in financial and energy stocks. This reflects expectations for improved profits in banks and insurers. In the case of energy stocks, more hedge funds bet on rising international oil prices, shifting to a net long stance. Conversely, there was relatively less pronounced movement in other sectors such as consumer and technology stocks.

A notable point is the timing of the global hedge funds' leverage increase. Hedge funds built positions ahead of US strikes on Iran. On June 13, Israel struck Iranian nuclear facilities, sending Middle East tensions soaring. The US subsequently launched further airstrikes on Iranian nuclear sites on the 21st.

Changes in hedge fund positions (increased leverage, long financials, more shorts on Europe/Asia, long energy stocks) seemed to correspond sharply with the US airstrikes on Iran and their aftermath. International oil prices rose over 10%, providing momentum for energy stocks. During the same period, European indices (STOXX 600) and Asian indices (MSCI AC Asia) fell by about 1–1.5%. The US index (S&P 500) dipped only 0.2%, remaining largely flat.

The increased allocation to financials by hedge funds is seen as closely related to interest rate conditions and monetary policy outlooks. Recently, the US central bank (the Federal Reserve) kept the policy rate unchanged at the June FOMC meeting. This suggested to markets a prolonged period of high interest rates. Such an environment of relatively high rates can boost the interest income of banks and other financial companies. Insurers, who invest premiums received from clients into bonds and other assets, also benefit, as higher rates lead to increased yield on their assets.

The pessimism displayed by hedge funds towards European and Asian markets is, according to some, due to Middle East instability. Airstrikes on Iran's nuclear facilities have heightened risks to global oil and energy supply chains, to which Europe and Asia are particularly vulnerable. Spiking oil prices can pressure high-dependency economies with both inflation and economic slowdown.

China reportedly depends on the Middle East for over 30% of its crude oil. Europe, too, since the Russia–Ukraine war, has seen its proportion of Middle Eastern oil and LNG rise, increasing exposure to energy price shocks. By contrast, the US—following the shale revolution—enjoys a higher rate of energy self-sufficiency and is less impacted by oil price spikes from the Middle East.

Some analysts suggest that, rather than outright predicting US attacks, hedge funds took risk-hedging actions or made probabilistic bets. Market consensus had already largely factored in the likelihood of US intervention. In retrospect, hedge fund positioning may appear to have been prescient, but if the US had not attacked Iran, hedge fund actions would have been explained by other factors such as Fed policy or economic indicators.

Gwyn Roberts, Head of Research at hedge fund research firm PivotalPath, recently argued, "Trend-following funds have failed to capture any clear trend due to market turmoil, while macro hedge funds have turned the volatility to their advantage, producing standout results so far this year."

Article by Kim Joo-wan kjwan@hankyung.com