So the point I’d make to refute : @Post_Market may weigh in or disagree
1) long/short pod models were running near peak leverage and max long going into this
2) as shorts run up they need to take leverage down which reduces whatever prior position was (so sell Longs)
There’s a tenuous but plausible story here. Obviously degrossing *per se* cannot cause a market crash since the same amount of stocks will be bought and sold. But it has knock on effects which *could* contribute to a market crash. Specifically, when a fund
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The meme lords have infiltrated http://dictionary.com pic.twitter.com/30nmHlfsjo
End of conversation
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degrosses it causes losses for other funds with similar positions as the longs are pushed down and the shorts up (and equity long/short funds and multi-manager pod shops tend to have quite large position overlap). This means two things -
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1. The volatility of the “hedge fund positioning” factor goes up, so their positions get more risky and 2. Their NAV decreases because of the losses. Both of those lead to more degrossing which perpetuates the cycle, and the second one in particular leads to de *netting*
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Why not? A gap down in price destroys value expeditiously, especially if flows are moving overwhelmingly in one direction
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My point is that if you are degrossing but maintaining the same net exposure, then the net flows are balanced and not overwhelmingly in one direction, so you don’t expect the overall market to go up or down (though can be large moves in individual name).
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