What’s going on here?
Systematic hedge funds have pumped the brakes, triggering a $109 billion selloff in global equity futures over the past month, says Goldman Sachs.
What does this mean?
It’s been a rough ride for hedge funds using systematic trading strategies, particularly commodity trading advisors (CTAs). According to Goldman Sachs strategist Scott Rubner, these funds have sold off around $109 billion in global equity futures. The chaos started with a market slide in early August, sparked by a mishap in investor positioning influenced by the Bank of Japan’s interest rate hike and weaker-than-expected US jobs data. This mass selloff is one of the largest and fastest Rubner has witnessed, driven by risk thresholds that required liquidation of positions. Adding fuel to the fire, US-registered hedge funds’ borrowing hit a decade-high, reaching $2.3 trillion by March, up 63% from December 2019. Just last week, traders dumped about $80 billion in stock futures, causing ripples across the market.
Why should I care?
For markets: Navigating market turmoil.
The markets are expected to remain unsettled, with Scott Rubner predicting a ‘tricky trading environment’ for the latter half of September. The VIX, a measure of market volatility, closed at its highest level in nearly four years on August 5. Additionally, options bets against market volatility have continued to unwind, and pension funds may rebalance in September, possibly selling more equities due to their improved funded status and lower bond yields.
The bigger picture: Shifting tides in financial strategy.
Hedge funds’ heavy reliance on leverage and systematic trading strategies has significant implications for market stability. The decade-high leverage, combined with rule-based liquidations by CTAs, illustrates the vulnerability of markets to sudden shifts. As hedge funds adjust to new economic signals like interest rate changes and job reports, such volatility may become more common, influencing global financial strategies and policies.