After the largest deleveraging wave in hedge fund history, Goldman Sachs trading desk records largest net buying since November 2020

Last week, the S&P 500 Index rose about 1% for the week—calm on the surface, but turbulent underneath.

According to the "Weekly Rundown" released by Goldman Sachs' Delta One trading desk, this week concentrated multiple extreme events: momentum factor volatility hit record highs, the Federal Reserve maintained a hawkish hold, Q2 earnings season peaked, and hedge funds underwent their largest concentrated deleveraging in over three years.

Following the reversal of the deleveraging trend, the Goldman Sachs trading desk recorded its largest net buying since November 2020, driven almost entirely by short covering, with net buying seen in both macro products and individual stocks.

Deleveraging: The Most Intense in Three Years

Early in the week, pressure erupted. Data from Goldman Sachs Prime Brokerage showed that the cumulative deleveraging scale over the three days from the previous Friday to last Tuesday was the largest since November 2022 in Goldman Sachs Prime records, while single-stock deleveraging was the largest since March 2025.

The momentum factor (GSPRHIMO) fell 7% for the week, with deleveraging driven mainly by long selling in popular AI stocks and short covering in macro products.

Goldman Sachs wrote in the report: "Hedge fund flows exhibited clear signs of capitulation early in the week."

From a global perspective, this deleveraging magnitude was the largest since the meme stock frenzy of January 2021, and the second largest in the past decade. The speed of short covering exceeded long selling at a ratio of 1.3:1. North America (dominated by short covering) and Emerging Markets Asia (dominated by long selling) were the regions with the largest deleveraging scales.

Reversal: Momentum Factor Surges 13% in a Single Day, Largest in Over a Decade

The turning point occurred from Wednesday to Thursday.

On Wednesday, the Federal Reserve meeting results were hawkish—three committee members voted to raise interest rates, and Chair Powell provided no forward guidance. The 30-year U.S. Treasury yield subsequently rose to its highest level since 2007.

However, the market quickly reversed on Thursday. The S&P 500 rose 1.67% in a single day, and the Nasdaq 100 rose 3.36%. The momentum factor GSPRHIMO surged 13% in a single day, marking its largest single-day gain in over 10 years.

Catalysts came from two directions:

• Microsoft (MSFT) shares rose 15% in a single day after earnings, with cloud business data exceeding expectations directly boosting confidence in AI trades;
• Liquidation pressure from hedge fund Situational Awareness eased—the fund transferred its public market equity positions to Citadel, dissipating the risk of forced selling hanging over the market.

On Friday, Amazon (AMZN) released its Q2 earnings. AWS revenue grew 37% year-over-year, and capital expenditure plans were raised by $220 billion. The stock price rose 12% in a single day, driving hyperscale cloud computing stocks (Hyperscalers) to record their largest single-week outperformance relative to the Nasdaq ever.

Net Buying: Largest Scale in Nearly Five Years

Following the sudden reversal of deleveraging, funds quickly flowed back in.

Goldman Sachs reports show that U.S. equities recorded their largest single-week net buying since November 2020 last week. This net buying was driven almost entirely by short covering, with relatively limited net buying from long positions.

Specifically:

• Macro products (indices + ETFs) accounted for 58% of total net buying (+3.2 standard deviations, 1-year dimension). Short covering far exceeded long selling, with a ratio of 3.4:1; short positions in U.S.-listed ETFs declined for the fourth consecutive week, dropping 4.3% this week, with short covering most evident in technology, small-cap, and financial ETFs.
• Individual stocks accounted for 42% of total net buying (+2.3 standard deviations, 1-year dimension), dominated by short covering supplemented by long-term buying, with a ratio of 2.1:1.

Among the 11 sectors, 8 recorded net buying, led by Information Technology, Consumer Discretionary, Financials, and Materials; Healthcare, Utilities, and Consumer Staples were the only three sectors with net selling.

Tech Stocks: Hedge Funds Net Buy for Two Consecutive Weeks, Fastest Pace Since December 2022

During the dense earnings week, hedge funds net bought U.S. Information Technology stocks for the second consecutive week, at the fastest pace since December 2022 (+1.9 standard deviations, 1-year dimension), driven by both long buying and short covering.

In detail, Software (short covering + long buying), Semiconductors & Equipment (long buying > long selling), and Technology Hardware (long buying + short covering) were the sub-sectors with the most net buying this week.

The "Magnificent Seven" (Mag 7) recorded net buying for four consecutive trading days. The current net allocation ratio is approximately 16% (the year-to-date low was about 14%), placing it at the 12th percentile over the past year.

Notably, the U.S. Materials sector stood out this week, with net buying reaching its largest scale in four months, ranking at the 98th percentile in a 5-year lookback, driven almost entirely by long buying.

Chemicals, Building Materials, and Containers & Packaging sub-sectors led the gains. The current gross and net allocations for the Materials sector (as a percentage of total U.S. net market capitalization) are 3.2% and 2.5%, respectively.

Leverage Levels: Rising but Still Low

As net buying poured in, hedge fund leverage ratios rose simultaneously.

Vincent Lin of Goldman Sachs Prime Brokerage pointed out in the report that the total leverage ratio of U.S. long/short strategy funds rose by 3.9 percentage points to 208.1% (at the 18th percentile over a 1-year period), and the net leverage ratio rose by 1.1 percentage points to 52.8% (at the 45th percentile over a 1-year period).

Absolute levels remain historically low—this means there is still room for further leveraging in the market, but it also indicates that this rebound is not built on a foundation of high leverage.

Outlook: Factor Volatility is Key, Gray Swans Remain

The Goldman Sachs trading desk noted that for investors to truly signal a "full entry," momentum factor volatility needs to stabilize first.

Meanwhile, the trading desk has received inquiries from investors exploring how to reposition tech/AI trades. Mentioned directions include: WDC and STX in the memory chip sector; ADI and TXN in analog semiconductors; and hyperscale cloud providers, especially AMZN and MSFT.

However, Goldman Sachs also explicitly highlighted a potential "gray swan" risk:

"The collapse of Situational Awareness was just the beginning—there are still a large number of hedge funds holding highly leveraged long chip positions via Total Return Swaps (TRS). According to our estimates, the size of such positions exceeds $100 billion. If the stock market falls again, it will inevitably trigger more forced liquidations and position transfers."