After missing out on the April rebound, hedge funds are in a panic to "chase the rise" of U.S. stocks!

As U.S. stocks approach historical highs, the smartest money on Wall Street is staging a strategic reversal.

Goldman Sachs' latest trading data shows that after a massive sell-off and short-selling in April, hedge funds have now entered a state of full panic buying mode, net buying U.S. stocks for the fifth consecutive week, with long purchases exceeding shorts by a ratio of about 3 to 1.

The trend in long-short leverage also confirms this, as the total leverage of U.S. fundamental long-short strategy funds recently hit a historical high of 215%, now down 2.5% to 210.6%, marking the largest single-week decline since early April, but the current leverage level remains at a very high position in the 97th percentile over three years.

More notably, the net long-short leverage ratio has risen for the fourth consecutive week by 0.9% to 51.2% (38th percentile over three years), while the long-short ratio has rebounded 1.5% to 1.642 from a near-record low two months ago (8th percentile over three years).

It is worth mentioning that this week is packed with important economic data: the first meeting of the China-U.S. economic and trade consultation mechanism, the U.S. CPI data on June 11, and a series of bond auctions. The technology sector will be in the spotlight, with AI-related events from companies like Apple at WWDC, NVIDIA, and AMD testing the market's confidence in infrastructure spending.

Hedge Funds Enter "Panic Buying" Mode

Hedge fund managers are collectively throwing in the towel.

Macro products (including indices and ETFs) account for 23% of total net buying, primarily driven by short covering and long buying. Notably, after three consecutive weeks of covering, short positions in U.S.-listed ETFs increased by 0.2% this week (still down 15.7% month-over-month), mainly concentrated in short positions in large-cap stocks, industrials, and corporate bonds ETFs, partially offset by covering in technology ETFs.

Net buying of individual stocks has dominated for the fifth consecutive week, accounting for 77% of total net buying, with long purchases exceeding short sales by a ratio of 2.2 to 1.

Out of the 11 sectors in the U.S., 8 saw net buying, with nominal amounts led by information technology, healthcare, industrials, and energy, while communication services, materials, and utilities faced net selling.

Industrial Stocks Become the Biggest Winners, Biotech Surge Continues

In this game of capital reallocation, industrial stocks have emerged as the biggest beneficiaries. Net buying of U.S. industrial stocks by hedge funds has reached a new high not seen in over seven months, with long purchases exceeding shorts by a ratio of 3.7 to 1. This week, nominal long buying of U.S. industrial stocks reached its highest level in nearly four years, with almost all sub-sectors seeing net buying.

Ground transportation, aerospace and defense, trading companies and distributors, as well as professional services have become the most favored segments. Despite such strong buying activity, net positions in industrial stocks remain relatively low compared to the past year, which may suggest that there is still room for a continued rally The surge in the healthcare sector is equally noteworthy. Hedge funds have net bought U.S. healthcare stocks for the sixth consecutive week, entirely driven by bullish buying. Biotechnology, pharmaceuticals, and healthcare service providers have become the most sought-after sub-sectors.

Notably, the long-to-short ratio of U.S. biotechnology stocks has now reached 3.83, a significant increase from 2.90 at the beginning of 2025, marking a two-year high. This figure is at the 86th percentile over the past five years, indicating that the optimism towards this sector has reached extreme levels.

Technical Signal as VIX Breaks Below 17

The VIX fear index closed below 17 for the first time this week, hitting a new low since February, providing another dimension of evidence for this institutional buying surge. Goldman Sachs analyst Paul Leyzerovich pointed out that the continuous rise in U.S. stocks has driven volatility to continue compressing (VIX fell 1.7% week-on-week), with the VIX futures curve steepening.

According to CFTC data, from April 22 to May 27, institutional positions in VIX index futures have decreased for five consecutive weeks, with a total reduction of $14.3 million in volatility exposure, primarily driven by new short positions.

Divergence and Misaligned Trades of Smart Money

At Goldman Sachs' equity sales trading desk, the flow of funds shows a divergent pattern. Pure long strategy funds net sold $3 billion, while hedge funds remained roughly flat, indicating stronger bullish sentiment than pure long strategies among institutions.

Goldman Sachs traders noted a significant amount of "misaligned trades" this week, with Goldman Sachs' hedge fund VIP basket underperforming the most short basket by 8%. The largest selling deviation occurred in the industrials and consumer discretionary sectors, while buying deviations were concentrated in large-cap biotechnology stocks, communication services, and mega-cap tech stocks with positive commercial momentum.

Goldman Sachs technology trader Peter Callahan emphasized that while the good news is that the Nasdaq has achieved over 2% gains for two consecutive weeks, rising about 30% from its lows and nearing historical highs, the "not-so-good news is that the best performers last week were the 'most short' basket," followed by TMT stocks that lagged for 12 months (up 7% for the week), as investors tried to keep pace and manage long exposures amid strong momentum.

Risk Warning and Disclaimer

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