A few days ago, someone remarked, “Kris, it seems like everyone is hedged right now; everyone is bearish.” It’s easy to become ensnared in the echo chamber of active market participants.
However, it’s important to recognize that the substantial flows influencing markets take time to pivot and aren’t reactive to every minor market movement. One aspect of derivative markets is their ability to reflect market sentiment through pricing, this offers insight into whether participants are hedged. The law of supply and demand is ALWAYS mirrored in these prices.
Internal Metrics:
Increased activity of corporate hedgers? (No)
Margin requirement increases from prime brokers? (No)
Competitive tail buyers on agency platforms? (No)
Lack of outright tail sellers in the voice community? (No)
Rapid increase in short volatility hedge fund outflows or long volatility hedge fund inflows? (No)
Increased volume activity in bearish ETF products? (No)
The claim that “everyone is hedged” is just not true, regardless of how you flip it or what metric you look at. While tactical market participants have reduced equity exposure, there hasn’t been a significant move toward crash protection. With rapid policy reforms emerging, headline and jump risks are likely to increase volatility.
The gradual decline in 2022 was orderly, largely due to the Federal Reserve’s effective signaling and management of expectations. Although the current environment may start similarly, it doesn’t necessarily mean it will end the same way. Trump by nature is a bit more unpredictable, especially when he is doing something he’s never done before-tearing down an economy for a rebuilding.
