Liquidity demand reshapes US equity financing costs and execution timing

An unusually strong bout of demand for dollar liquidity in equity financing markets has pushed the cost of funding synthetic exposure to US equities to levels more commonly seen at year-end, complicating execution for investors and creating fresh opportunities and challenges for market participants.

The move has been driven by a combination of heavy trading volumes in US-based leveraged products, robust demand from Asia, the massive growth of the US hedge fund industry, and a surge in AI capital expenditure. Together, these forces have tightened dollar funding pricing and pushed up the cost of hedging offshore equity exposure.

Leveraged ETFs and Hedge Fund Expansion Amplify Pressures

The rapid growth of leveraged and inverse exchange-traded funds (ETFs) has added to those pressures. Assets under management in US-listed leveraged ETFs are approaching $200bn, with semiconductor-linked products among the most active. These vehicles require counterparties and dealers to adjust hedges dynamically to maintain target leverage, often increasing underlying funding needs disproportionately to the assets held in the funds themselves.

This pressure is compounded by the massive expansion of the US hedge fund industry, which heavily relies on synthetic strategies and prime brokerage financing. The top five prime brokers now carry balances exceeding $6.2 trillion, reflecting surging activity in equity swaps and other derivatives that demand continuous dollar liquidity to support leverage and risk management.

Most of this demand is driven by an increase in gross leverage among multi-strategy and quantitative funds. In addition, with the S&P 500 close to multi-year highs, the absolute amount of capital required to finance these exposures has also risen.

The $1 Trillion AI Capex Impulse and Asian Demand

Capital expenditure on AI has provided another powerful impulse. With an estimated $1 trillion in funding requirements for data centres, chips, power infrastructure, and related projects this year alone, the sector is generating enormous demand for capital. This has amplified borrowing needs which are often fulfilled by both equity and debt capital markets, which further drains short-term and investment liquidity from global markets.

That has made financing markets more sensitive to swings in investor flows. Large daily moves in leveraged products can trigger substantial rebalancing activity, amplifying demand for both hedging instruments and the dollar liquidity needed to support them.

Asia has provided a further impulse. Strong performance in large-cap semiconductor stocks, including SK Hynix, Samsung Electronics and TSMC, has helped drive regional risk appetite, while the expansion of leveraged ETF activity in Korea has pushed local funding rates sharply higher.

Other market indicators point to the same conclusion. Pricing in US equity swaps, futures and total return instruments has remained rich relative to historical norms through much of 2026. 

Implications for South African Institutional Investors

The issue is particularly relevant for South African institutional investors, many of whom access offshore equity markets synthetically rather than through direct purchases of foreign assets. Common routes include dollar-denominated total return swaps and international futures listed on Safex, the derivatives platform of the Johannesburg Stock Exchange.

Activity in these markets remains strong. The latest JSE/Safex figures show open interest in international futures of more than R11bn, representing a 9% year-on-year increase.

Separately, around 46 per cent of the R262bn market capitalisation of locally listed ETFs is linked to international assets, underscoring the depth of demand among South African investors for non-ZAR equity exposure. Much of that synthetic activity is ultimately financed or hedged using dollar liquidity. As a result, shifts in US funding conditions are increasingly feeding through into the pricing levels to local investors.

Navigating Execution and Volatility in Non-ZAR Equity Exposure

There have, however, been signs of short-term variation. Pricing in S&P 500 total return futures, another widely used instrument for gaining or hedging US equity exposure, rose materially in recent weeks before easing somewhat. Even so, the broader environment remains one in which execution timing has become more important.

For South African investors, that means offshore allocation decisions can no longer rely solely on market direction or valuation. The recent retracement in funding rates, as indicated by the offshore futures market, compels one to assess whether current levels are ideal for accessing non-ZAR equity exposure – Sep-26 Total Return futures were trading between 50-60bps over the reference rate. Rates rapidly escalated to over +120bps, with the peak towards the back end of June. The pullback sees the market printing at +65 basis points for now. Will these lower rates persist?

If demand for US equities remains firm, particularly through leveraged products and financing provided by global prime brokers, and AI-related financing needs continue to grow, investors must think more deliberately about execution for non-ZAR equity trading strategies.