A market optimist might brush off Friday’s massive liquidation as a one-off event — a huge stumble by a fabled player now in decline. But this is no time to be optimistic. Hwang is representative of, not distinct from, the rest of the hedge fund crowd. His bets are also their bets. He may have gotten margin calls faster because he was more leveraged. But his positioning is by no means unique — and that commonality is where trouble may lie.
Take the trades involved. Media companies such as ViacomCBS and Discovery have net exposures that are the “highest level we have seen since 2016,” according to a recent note from the prime brokerage unit at Morgan Stanley, which, alongside Goldman, managed some of the block trades on Friday. Last week, when ViacomCBS was using the steep run-up in its stock to sell new shares and bolster its balance sheet, the pressure on leveraged hedge funds must have been intense.
Rising yields and companies selling additional shares at rich valuations puts pressure on leveraged trades. It was inevitable that the rotation out of stay-at-home champions, who saw a one-time boost to business, would see a reality check in 2021. Last week’s block trades were an example of that.
Credit Suisse and Nomura took the brunt of selling pressure in the financial sector because of their net exposure. However, exposure has been limited within the broader sector so far.Click HERE to subscribe to Fuller Treacy Money Back to top