Some of the most aggressive traders in the market are embracing stocks after avoiding them for almost a year.

Rather than bailing during rallies, hedge funds are jumping in, just as the S&P 500 Index vaults back to records. Net leverage, a measure of industry risk appetite that takes into account long versus short positions, has risen by 6.6 percentage points to 63.9% in June, on course for the biggest increase in three years, data compiled by Goldman Sachs Group Inc.’s prime brokerage unit showed. The funds started the month with the lowest leverage since 2016.

The willingness to warm up contrasts with the previous four months, when the group sat out a global rally that added $10 trillion to equity values. That caution proved prescient as stocks tumbled in May amid an escalation in global trade tensions. Now, with the Federal Reserves opening the door to rate cuts and optimism growing for a resolution to the U.S.-China trade war, the fear of missing out may be back, according to Benjamin Dunn, president at Alpha Theory Advisors LLC.

“Many weathered the sell-off in May pretty well and were able to potentially act a little bit aggressively,” Dunn said by phone. “It’s a bullish signal. It speaks to some level of confidence,” he added. Still, “it’s a big move off a very low base. I’ll watch to see if they continue to extend their length.”

Strategists such as JPMorgan Chase & Co.’s Marko Kolanovic have pointed to light exposure from professional speculators as one reason this year’s rally has room to run. Even after the jump, leverage at Goldman’s hedge fund clients is still below the 12-month average of 64.7% and far from the peak reading of 72.3% reached in July last year.

The increase in exposure reflects investors adding longs and trimming shorts. Among sectors, technology and health-care stocks last week saw the biggest increase in bullish positions while industrial shares had the biggest reduction in bearish bets.

At Morgan Stanley, another measure -- sector tilts among hedge fund clients -- paints a slightly different picture, reflecting a retreat in risk aversion. In a note dated June 19, the bank said its clients were net sellers of real-estate and consumer-staple shares almost every day in the past 1 1/2 weeks, while buying in utility shares that spiked in April and early May reversed to selling.

A rotation occurred within tech stocks. Software makers, a group that’s favored by hedge funds as its service-based revenue is seen more resilient than component producers such as semiconductors, have seen the biggest selling this month among industries tracked by Morgan Stanley. Meanwhile, chipmakers, among the most hated stocks, enjoyed the biggest buying spree in two months on June 18, the firm’s data showed.

But hedge funds have yet to embrace cyclical stocks, such as commodity producers and industrial companies whose growth is more dependent on the broad economy. Exposure in both materials and energy shares sat at or near their lowest levels since 2010, according to Morgan Stanley data. While industrials has boasted the biggest demand in June, most of the purchases are concentrated in areas with more price stability like aerospace and defense.

“As hopes for a potential trade resolution between the U.S. and China come into focus, we are starting to see funds sell parts of defensives and growth tech over the past two weeks,” Morgan Stanley wrote in the note. “While we haven’t quite seen a meaningful reengagement on the cyclical front, we are starting to see flows shift.”

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