Key Takeaways
- • U.S. long/short equity hedge funds have generated a modest 1% year-to-date return through May 2025 despite market turmoil, with alpha generation on both long and short sides offsetting broader volatility and underperformance of the S&P 500 (also +1%).
- • Short interest has surged to levels unseen since the 2021 short squeeze, with hedge fund ETF shorts reaching $218 billion at Q2 start and single-stock shorts climbing to $948 billion, while median S&P 500 short interest rose to 2.3% of float from 1.8% in December.
- • Gross leverage among fundamental long/short equity hedge funds has hit a new record high (100th percentile), while net leverage remains in the 16th percentile versus the five-year average, indicating managers are aggressively positioned despite constrained net exposure.
- • Goldman Sachs' basket of the most popular hedge fund long positions is up 6% year-to-date, outperforming concentrated shorts in most sectors; only financials and information technology show meaningfully below-average short interest levels historically.
- • Solid stock-picking execution has proven essential for hedge fund survival in 2025, with managers relying on differentiated alpha generation to maintain positive returns amid elevated volatility and compressed market multiples.
Summary
Long/short equity hedge funds are clinging to positive performance in 2025 through disciplined stock selection and increased short positioning, even as the strategy faces headwinds from market volatility and concentrated long outperformance. Year-to-date, the average U.S. long/short equity hedge fund has generated a 1% return, matching S&P 500 performance despite significant market turbulence. According to Goldman Sachs' "Hedge Fund Trend Monitor," managers have maintained this modest positive performance through alpha generation on both long and short sides of their books, though the distribution of returns has become increasingly uneven.
The composition of hedge fund positioning has shifted dramatically in 2025. Goldman Sachs' basket of the most popular hedge fund long holdings is up 6% year-to-date, outperforming the concentrated short positions held across most sectors. This dynamic reflects managers' ongoing challenge to extract alpha from both sides of their portfolios. Notably, only two sectors—financials and information technology—currently exhibit meaningfully below-average short interest levels relative to the last three decades, suggesting concentrated short exposure elsewhere in the market.
Short interest has rebounded to levels not seen since the 2021 short squeeze, marking a significant structural shift in hedge fund strategy. ETF shorts have risen to $218 billion at the beginning of Q2, while single-stock shorts have climbed to $948 billion. The median S&P 500 stock now carries short interest of 2.3% of its float, up from 1.8% in December, representing the first time short interest has exceeded long-term averages since the height of the 2021 squeeze.
The aggressive positioning has forced a recalibration of leverage across the hedge fund industry. Gross leverage among fundamental long/short equity hedge funds has reached a new record high, placing managers in the 100th percentile relative to historical norms. Conversely, net leverage remains subdued, ranking in the 16th percentile versus the five-year average, indicating that while managers are deploying substantial gross capital, their net directional exposure remains constrained. This dynamic reflects a deliberate strategy to maintain flexibility amid market uncertainty while maintaining elevated short positions.
The current environment underscores the critical importance of stock-picking skill in long/short equity management. With beta opportunities limited and sector dynamics divergent, managers are surviving on alpha generation rather than broad market participation. The year 2025 has become a showcase for differentiated portfolio construction and security selection, as those lacking conviction in either direction face pressure to maintain relevance with minimal net exposure.
The composition of hedge fund positioning has shifted dramatically in 2025. Goldman Sachs' basket of the most popular hedge fund long holdings is up 6% year-to-date, outperforming the concentrated short positions held across most sectors. This dynamic reflects managers' ongoing challenge to extract alpha from both sides of their portfolios. Notably, only two sectors—financials and information technology—currently exhibit meaningfully below-average short interest levels relative to the last three decades, suggesting concentrated short exposure elsewhere in the market.
Short interest has rebounded to levels not seen since the 2021 short squeeze, marking a significant structural shift in hedge fund strategy. ETF shorts have risen to $218 billion at the beginning of Q2, while single-stock shorts have climbed to $948 billion. The median S&P 500 stock now carries short interest of 2.3% of its float, up from 1.8% in December, representing the first time short interest has exceeded long-term averages since the height of the 2021 squeeze.
The aggressive positioning has forced a recalibration of leverage across the hedge fund industry. Gross leverage among fundamental long/short equity hedge funds has reached a new record high, placing managers in the 100th percentile relative to historical norms. Conversely, net leverage remains subdued, ranking in the 16th percentile versus the five-year average, indicating that while managers are deploying substantial gross capital, their net directional exposure remains constrained. This dynamic reflects a deliberate strategy to maintain flexibility amid market uncertainty while maintaining elevated short positions.
The current environment underscores the critical importance of stock-picking skill in long/short equity management. With beta opportunities limited and sector dynamics divergent, managers are surviving on alpha generation rather than broad market participation. The year 2025 has become a showcase for differentiated portfolio construction and security selection, as those lacking conviction in either direction face pressure to maintain relevance with minimal net exposure.
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