Via Goldman:
Over the last week, the unwind of popular Hedge funds short and long positions triggered a sizable spike in market volatility and raised concerns about the influence of retail investors’ activity. The most shorted US stocks surged to record levels alongside one of the largest short squeezes in history. The covering of short stock positions prompted a large de-grossing with an unwind of popular long positions -most popular stocks held by Hedge funds declined by 5% last week.
The cross-asset spillover of the positioning unwind has been somewhat limited so far. Outside EM, main equity indices have not registered a 5% correction. Rates have remained close to post-crisis highs and energy commodity prices barely moved supported by shrinking supply. Only equity implied volatilities have reacted materially. The VIX spiked above 30% over the last week, overshooting the decline in the S&P 500 (Exhibit 2). Moreover, the increase in volatility coincided with an increase in short-dated option skew which is now back to March 2020 levels. With US equity options already discounting a large probability of downside tail, we prefer hedging via European equity options which are more levered to the risk of disappointments in the reopening phase and selectively with FX options.
