Hedge Funds Turn DefensiveHedge fund net leverage has fallen to 43.7%, the largest weekly decline since Liberation Day in April 2025 and the 4th largest in 5 years. Net positioning is now at the 0th percentile across both 1-year and 5-year lookbacks, while gross leverage remains at the 90th percentile.
This suggests hedge funds are not abandoning the market. They are cutting long positions and adding shorts, creating selling pressure, especially in high-beta names. The move appears driven more by positioning and risk management than by a sudden deterioration in business fundamentals. Retail investors have not yet stepped in strongly enough to absorb the selling.
If macro conditions improve, hedge funds may have substantial exposure to rebuild, while retail investors could return as confidence recovers. That combination could support a sharp rally. Until then, volatility is likely to remain high. The focus is on businesses with intact long-term fundamentals, especially AI infrastructure, since earnings, cash flows, and operating performance ultimately drive valuations.
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