Deleveraging

One cannot go about their days in the hedge fund industry without a colleague, client or portfolio manager mentioning “de-risking”.

Last week sadly marked a continuation of this trend, leading quant funds in particular to register some weak results.

As far as de-grossing has gone, there is still more that could come from the levered players in the marketplace. Meanwhile, fundamental strategies have largely reigned in their net exposure, which has protected them from downside capture on a marketwide selloff. However, with such a complicated and interwoven backdrop, gross exposure is the true risk since high cross asset and inter-equity dispersion does not necessarily mean market neutral is risk neutral.

Also, with nets low, gross continuing to fall, the ongoing risks of V-shape short squeeze rallies in low quality and highly shorted stocks will persist.

In October, hedge funds de-grossed at the sharpest pace in years. Morgan Stanley’s data showed global hedge funds gross flows down over 8% since June, the biggest de-grossing ever since MS started tracking in 2016.

TMT-focused hedge funds lost an average of 12% in October, and cut longs/shorts to protect H1 gains, further amplifying selloffs in names like Google, Intel, Nvidia, and AMD.

Hedge funds have now moved underweight the broader AI trade for the first time since early 2023.