It’s more popular than ever
A 2% drawdown in equities today isn’t big deal and even the 10% decline in the Russell 2000 from the highs is manageable. Of course, if you’re leveraged 5x, it’s a different story.
The declines in stock markets could quickly shift from bad to ugly because leverage in equity markets has rarely been higher. Margin loans at 1% aren’t hard to find and there are layers upon layers if you factor in options and other strategies.
These charts from Goldman paint an interesting picture.:
They note that hedge funds have cut gross leverage for four straight weeks but that net leverage remains high.
In an environment of ultra-high leverage, the kind of rout we’ve seen today can stay off the rails for awhile, especially if delta and covid can start to form a compelling argument.