Hedge funds posted a 5.35% return in May, outperforming the MSCI total return index's 4.55% gain. The rally was driven by U.S. tech stocks, with hedge funds increasing purchases at the fastest pace since June 2025. Leverage is at a five-year high.
Hedge funds experienced a strong performance in May, with stock-picking strategies leading the gains. According to a note from Goldman Sachs, these funds returned 5.35% in May, surpassing the MSCI total return index, which posted a 4.55% gain. The rally was largely driven by rising equities, particularly in the U.S. tech sector. Hedge funds increased their buying of stocks at the fastest pace observed since June 2025, focusing on information technology, consumer discretionary, financials, and industrials. Energy, communications services, and consumer staples were the only sectors that saw net selling. The note also indicated that crowded long trading positions contributed to the gains, as increased investor buying pushed prices higher and created a momentum that increased winning bets. Systematic stock trading hedge funds returned 0.84% in May. Furthermore, total borrowing by hedge funds increased significantly, reaching a five-year high in leverage. Some of the largest multi-strategy hedge funds, such as Schonfeld and Millennium, reported returns of 2.6% and 2.4% respectively for the month. Citadel also returned 1.43% in May.
Hedge funds' ability to outperform broad market indices, especially with high leverage, indicates strong stock-picking capabilities during a rally, but also signals increased risk-taking in the market.