A surge in forced liquidations on Nov 5 drove the net leverage of US long/short hedge funds down by 5% in a single session, the fifth-largest daily drop since 2010. This decline pushed hedge fund net leverage into its lowest decile for the period, exacerbated by the mechanical rebalancing of leveraged ETFs. Data from Morgan Stanley indicate that these funds, including SOXL and TQQQ, created an estimated $57B in equity selling pressure on that day alone.
The market shock triggered new capital returns and personnel cuts at multi-strategy firm Walleye, which let go of its head of equities and part of its long/short teams. Other firms faced severe liquidity pressure; Arini sold more than $2B in assets in one week to meet margin calls, and Lone Pine saw its year-to-date returns fall to -7.5%. In a client letter, the CEO of Engineers Gate noted that the high correlation between different multi-strategy funds during deleveraging events often transforms low-correlation strategies into systemic risks.
