High-Frequency Deleveraging: Hedge Funds Reduce Leverage to Five-Year Low

Original author: Dong Jing

Source: Wall Street View

Last week, hedge funds finally "threw in the towel." According to the latest data from Goldman Sachs, U.S. fundamental long/short funds significantly reduced leverage, marking the largest deleveraging since the March 2020 COVID-19 market crash. Net leverage fell to the lowest level in five years—at the 0th percentile—leaving U.S. equity managers with their lightest positions in five years. Meanwhile, the scale of selling in tech stocks has far exceeded that of this summer’s turmoil; CTA quantitative strategies continue to sell, and nearly all market sentiment indicators are signaling panic.

On Monday, November 9, Goldman Sachs’ institutional brokerage data showed that the total leverage ratio of U.S. fundamental long/short funds declined by 8.7 percentage points in the past week—the largest weekly drop since March 2020 at the onset of the COVID-19 pandemic. The net leverage ratio fell 3.7 percentage points to 43.3%, reaching the 0th percentile over a five-year historical lookback. In Monday’s report, Goldman trader Pierre Saboureault summarized that deleveraging has accelerated to its fastest pace since July, with the net leverage ratio of fundamental long/short funds hitting one-year, three-year, and five-year lows. Last Thursday exhibited classic signs of a “capitulation” sell-off.

Technology stocks have been hit hardest. Since early October, Goldman Sachs’ U.S. trading desk clients have net sold over $30 billion in technology stocks (TMT and communications services), significantly exceeding the $21–23 billion in selling during the momentum pullback in July. Meanwhile, CTA quantitative strategies sold approximately $11.6 billion in S&P futures and $3 billion in Nasdaq futures over the past five trading days, and models predict continued selling across various scenarios over the coming week.

Goldman Sachs trader Nelson Armbrust detailed the scale of this deleveraging in the “Today’s Key Points” report on November 9. The total leverage ratio of U.S. fundamental long/short funds declined by 870 basis points to 207.5% (26th percentile over one year), while the net leverage ratio fell by 370 basis points to 43.3% (0th percentile over five years). The beta-adjusted total leverage ratio dropped nearly 1,600 basis points in a single week; year-to-date, total leverage has decreased by 1,100 basis points and net leverage by 1,160 basis points, erasing more than half of the 2,190 basis point increase in total leverage recorded throughout 2025. The long/short ratio of 1.527 is at the 1st percentile for both three- and five-year periods.

Armbrust said, "This is a strong signal that positions are being liquidated."

Notably, when macro and systematic accounts are included in the global prime brokerage book, the overall gross leverage ratio slightly increases by 0.1 percentage points to 314.2% (the 85th percentile over the past year), while net leverage drops to the 4th percentile and the long/short ratio falls to the 3rd percentile. In other words, significant exposure remains in the market, but with almost no conviction.

From a global perspective, Saboureault’s data shows that global equities were net sold (−1.0 standard deviation over one year), deleveraging accelerated (−0.8 standard deviation over one year, the largest dollar deleveraging since July), and net long positioning sold at five times the pace of short covering. Individual stocks have experienced net selling for eight consecutive weeks, while macro products have seen net buying for three consecutive weeks. The global fundamental long-short net leverage ratio of 45.3% is the lowest in the past 12 months and at the 0th percentile for both one-year and three-year periods, with the long-short ratio at the lowest level in the past five years on Goldman Sachs’ books.

Morgan Stanley previously noted that the prolonged risk reduction this summer and in October represented the longest such period in 15 years for long/short funds—before last week’s market crash. After last week, the U.S. net leverage ratio fell further, from Morgan Stanley’s recorded 51% to 43% according to Goldman Sachs data.

The technology sector was the hardest hit during this sell-off. The information technology sector recorded the largest net outflows globally and in the United States, with this week’s net selling ratio in global tech stocks nearly matching the highest net selling week since Goldman Sachs began recording data in 2016, and four of the past five months have ranked among the top five largest net selling weeks on record.

Goldman Sachs broker Robbie Stankard noted that, in percentage terms, this week’s global technology stock sell-off was comparable to the levels seen in mid-October and September 2024, marking the largest net weekly sell-off since Goldman Sachs began recording data in 2016.

In his report titled "Putting Last Week Behind Us," Goldman Sachs trader John Flood wrote: Since early October, Goldman Sachs' U.S. trading desk clients have net sold approximately $30 billion in technology stocks (TMT and communications services), with about $6 billion of that occurring last week. In comparison, net sales during the momentum pullback in July totaled approximately $21 billion to $23 billion, meaning the current selling wave has exceeded that level by 30% to 40%. The only positive signal is that November 6 (Friday) marked the first net purchase of technology stocks in seven consecutive trading days, amounting to approximately $1 billion.

The industrial sector was also not spared. Industrial stocks ranked as the second-largest net seller globally and posted their largest percentage net outflow in five years, marking their fourth consecutive week of net selling. Among subsectors, electrical equipment, building products, aerospace & defense, trading companies, and distributors led the declines, while passenger airlines and machinery saw net buying. Stankard noted that the leadership of electrical equipment and building products in the decline is no coincidence—it reflects trades tied to data center power demand.

Year-to-date, net selling in the TMT sector has declined to levels near the July low, while the industrial sector saw selling volume exceeding three standard deviations over the past five days—the highest among all U.S. sectors.

In terms of performance, Goldman Sachs’ institutional brokerage estimates show that U.S. fundamental long/short funds lost 1.94% last week, while global peers fell 1.48%, compared to a 4.74% decline in the S&P 500 Total Return Index during the same period. U.S. equity managers have generated only a 5.47% return year-to-date, underperforming the S&P 500’s 8.43%. Technology-themed funds have fared even worse, erasing all their gains for the year as of Thursday.

Despite the largest deleveraging since the pandemic, Goldman Sachs' books still contain several noteworthy position structures. Flood listed five prominent sectors in the current prime brokerage books:

Mag 7 and hyperscale cloud computing (net allocation remains close to historical highs)

Residential home builders (book-to-bill ratio at a five-year low)

Dining (Long/Short ratio at a five-year low)

Electricity / U.S. Electrical Equipment (book net position, long/short ratio at a five-year low)

Small- and mid-cap biotech (still net long, with a long/short ratio above 3, but at a three-year low)

Most notably, despite the largest deleveraging since the pandemic, net allocations to the Mag 7 and hyperscale cloud computing remain near historical highs, while the book has shifted to net short positions in residential and power/electrical equipment. In other words, while funds have broadly sold off technology stocks, they continue to hold onto long positions in the “funders”—the hyperscale cloud giants. If markets deteriorate further, this final crowded trade could become the next target for selling.

Last week, CTA quantitative strategies acted as a downward accelerator. It is estimated that CTAs sold approximately $11.6 billion in S&P futures and $3 billion in Nasdaq futures over the past five trading days.

More concerning is the subsequent pressure. Saboureault’s systematic strategy summary shows that systematic/CTA signals are currently negative across 50% to 60% of global equity markets, including the S&P 500 and most major markets.

Stankard's scenario analysis shows that, regardless of market direction over the coming week, CTAs will remain sellers:

• Flat scenario: Selling approximately $23.3 billion (including approximately $31.1 billion in S&P)
• Bullish scenario: Sell approximately $3.9 billion (of which S&P is approximately $23.1 billion)
• Bearish scenario: Sell approximately $48.7 billion (of which S&P is approximately $31.5 billion)

Over the next month, CTA strategies will only turn net buyers under a strong upward scenario (buying approximately $74 billion, including about $14.4 billion in S&P); under a downward scenario, global equity selling could reach approximately $149.5 billion.

Key technical levels for the S&P 500: short-term around 7675, medium-term around 7549, and long-term around 7084. The current index closing price is above all these levels, which is why quantitative strategies continue to sell.

Multiple market sentiment indicators have issued strong panic signals.

Goldman Sachs' "Fear Index": Armbrust noted that readings above 9 have historically been good buying opportunities; the index reached 9.57 last Thursday and closed the weekend at 9.2.

“Multiple Surprise Ratio”: Developed by Goldman Sachs derivatives expert and strategist Brian Garrett, this metric measures the multiple of an asset’s daily price movement relative to the previous day’s implied volatility from options. This week, the S&P 500 recorded the highest ratio in 19 years, the Nasdaq ranked second, and the Russell 2000 placed in the top five—indicating that options markets have underestimated this volatility more than at any time in over two decades.

Market microstructure is also under pressure: S&P futures order book depth has fallen to $4.15 million, far below the average of $11.4 million; 1-month implied correlation has surged from under 10% in the summer to approximately 26%; the spread between Nasdaq and S&P implied volatility has widened to nearly 9 percentage points, approaching the summer momentum crash record of 12.6 points; put skew remains elevated at 1.20, while call skew has dropped to 0.76.

The Goldman Sachs Risk Appetite Index (GSRAII) has fallen to -0.65, but has not yet reached the -1 strong buy signal level cited by Armbrust. The index stood at -2.03 during the COVID-19 low in March 2020.

Retail investors are also beginning to waver. Saboureault described retail behavior as "blinking." Last week saw the two most negative daily buy-sell skew readings since early June, with net retail purchases of the S&P 500 dipping below zero twice. The AAII survey showed that, for the week ending November 4, the bearish sentiment surged by 7 percentage points to 48.4%, 17 percentage points above the historical average; the CNN Fear & Greed Index rose slightly from 19 to 24 but remains in the "extreme fear" zone.

The only exception is Goldman Sachs’ own U.S. equity sentiment indicator. This composite metric, which encompasses nine positioning indicators covering institutional, retail, and foreign investors, actually rose from +0.2 to +0.6. The threshold for a light positioning signal is below -1.0, which is far from being reached. This is because continuous buying by mutual funds and foreign investors has kept the composite indicator in positive territory, meaning the contrarian bullish signal that “everyone has already exited” remains incomplete.

On the other side of hedge funds massively liquidating positions is "slow money" buying against the trend.

Regarding mutual funds, according to EPFR data, for the week ending November 4, global equity funds saw net inflows of approximately $89 billion (up from $56 billion the previous week), with about $37 billion flowing into U.S. funds; over the past four weeks, cumulative net inflows reached approximately $265 billion, of which about $111 billion went into U.S. funds. Technology funds again recorded the largest net inflows, despite recent volatility in AI-related stocks. Cross-border capital inflows into U.S. funds have continued to rise, approaching $1 trillion in total since 2022.

Regarding corporate buybacks, approximately 90% of S&P 500 constituents have now exited their buyback blackout periods, with this figure expected to rise to about 93% by the end of the weekend. According to Goldman Sachs’ buyback trading desk report, activity accelerated significantly last week, driven by post-election momentum and an active earnings season; the proportion of discretionary open-market orders rose from 22% the prior week to 33%, with execution volumes reaching approximately 1.6 times the daily average of last year. Buyback authorizations since the start of 2026 have already reached $1.5 trillion, surpassing the full-year 2025 record of $1.37 trillion.

However, supply pressure remains significant—last week, IPOs and secondary offerings in North America totaled $16.3 billion, bringing the year-to-date total to $536 billion, and corporate buybacks will need to continue absorbing this supply pressure.

Despite a challenging week, Flood lists four reasons to maintain a constructive outlook: S&P 500 third-quarter earnings per share growth is tracking at 35% year-over-year; market breadth has improved significantly; the S&P 500’s P/E ratio is around 18x, placing it at the 31st percentile over the past decade, with the communication services sector even at the 4th percentile of its own ten-year history; companies are actively buying on dips.

According to Armbrust, citing Goldman Sachs semiconductor analysts, relevant stocks have clearly entered oversold territory, and the risk-reward profile is attractive for certain individual stocks, with particular optimism highlighted for NVIDIA, Broadcom, Applied Materials, and Lam Research.

However, multiple pressures remain unresolved. Saboureault summarized: “Oil prices have fallen, yields have declined, and volatility needs to stabilize further before capital can re-enter the market.” While last week may have been a “moment of surrender” for hedge funds, the true market bottom may still await the completion of remaining selling programs by CTAs, following the stabilization of volatility and the release of Tuesday’s CPI data and NVIDIA’s earnings report on November 17.