According to Morgan Stanley’s prime brokerage, the drop in hedge funds’ exposure last Wednesday was historic, according to a rule of thumb for a normal distribution of statistical data.
At 11 standard deviations away from the mean in data going back to 2010, this deleveraging was the fastest since the onset of the pandemic in March — when there was the biggest move in a decade.
Behind this potential VaR shock, this is a Regulation shock. All members are on the same side to fulfill regulation requirements. Excepted the Central Bank, no-one will be able to save HFs or Prime Brokers if too many of them enter in the red zone.
In addtion, numerous HFs making arbitrage between US Treasuries and Futures are short Vol. After the VaR shock, the Vol shock could spread the tension into fixed income market…
This element is not activated yet and till the US 10Y doesn’t recover 1.25% or the MOVE index skyrocket, the drop in equity indices should be under control. All depend how the weaponization of options by the Retail Army will be addressed by Regulators…