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Higher interest rates boost hedge fund stock borrowing to record high - Goldman
Published May 24, 2023 08:29AM ET
© Reuters. A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 22, 2023. REUTERS/Brendan McDermid
By Nell Mackenzie
LONDON (Reuters) - Borrowing across the global hedge fund industry has hit record highs, Goldman Sachs (NYSE:GS) said in a note to clients on Wednesday, as rising interest rates make it cheaper for speculators to borrow stock and bet on movements in company stock prices.
But hedge funds overall remain undecided on the market direction, Goldman's data showed, suggesting they were held back by macroeconomic uncertainty.
To bet against a stock's price, or go short, hedge funds pay fees to borrow the stock and post assets as collateral with the banks, meant to act as insurance against default. While the stock is borrowed, the hedge fund is owed interest payments on this collateral.
Higher rates have meant that this collateral now earns hedge funds back some money on what they have borrowed, making it cheaper than ever before to borrow a stock and bet that its share price will decline.
Low interest rates for the past 15 years have meant that these payments were too small to cover any other stock borrowing fees, like dividend payments. But now the collateral hedge funds put up to trade actually makes them money.
So short exposures have now reached their highest level on record, Goldman said, catching up with the number of bullish positions, driven in part by the rising payments hedge funds receive on their collateral.
Because the prospect of a global recession remains unclear, stock picking hedge funds as a group have not sided on bets that stocks will rise or fall, said Bruno Schneller, a managing director at INVICO Asset Management.
"Hedge funds that missed the rally might not have been comfortable increasing net exposure at this stage," said Schneller.
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