As searing cross-asset turbulence threatens to end an epic bull run in equities, fast-money asset managers are reducing risk and getting out.

“De-risking” is the buzzword du jour on Wall Street, where hedge funds and their ilk are cutting positions, selling stocks and covering shorts. So-called degrossing activity in U.S. single stocks has climbed to the highest in a year, according to prime-broker data from Goldman Sachs Group Inc.

In markets already wary of central bank tightening, Russia’s invasion of Ukraine has left virtually no asset immune from heart-stopping swings. Volatility in stocks, bonds, commodities, gold and oil is in each case the highest in a year, a concerted bout of pressure with few precedents, data from Sundial Capital Research show.

“The volatility of everything is spiking,” the research firm’s Jason Goepfert wrote in a note Monday. “That’s an incredible bout of cross-asset concern that we’ve rarely seen in the past 30 years.”

There have been few signs of outright panic so far but the danger exists that the selling may snowball. Giant asset managers operate under risk-management frameworks where rising volatility often necessitates the unloading of portfolio assets, a cycle of selling sometimes referred to as a VAR shock in a reference to the value-at-risk model.

Concern is rising that higher commodity prices will hurt consumer sentiment. The S&P 500 posted its biggest drop since 2020 on Monday on worries about the fallout from quickening inflation. The Nasdaq Composite Index has dropped more than 20% from a record to enter a bear market.

Over the past week, some Wall Street strategists cut their 2022 year-end targets for the S&P 500, with recession risk among the concerns cited.

“Market volatility is being driven by entirely unpredictable events,” 22V strategists led by Dennis DeBusschere wrote in a note Monday. “And that will remain true until there is some near-term resolution to the war in Ukraine.”

The Cboe Volatility Index, or VIX, a gauge of implied equity swings for the S&P 500, is at the highest since early 2021. The ICE BofA MOVE Index, a similar gauge but for Treasuries, is at levels last seen at the height of Covid-19 pandemic uncertainty in March 2020. The JPMorgan Global FX Volatility Index is also at the highest since 2020.

Equity, rates and commodity volatility is “extremely stressed,” though the situation is comparatively better in the foreign-exchange markets and for credit spreads, Credit Suisse Group AG strategists led by Mandy Xu wrote in a note Monday.

 

In dollar terms, the risk unwind in U.S. single stocks last week was the fifth-largest over the past five years, Goldman’s prime-broker data showed. Single-stock longs were net sold for the first time in seven weeks, while single-stock shorts saw the largest covering since late December, which according to Goldman suggested hedge funds reduced risk on both sides of the equation.

There were hints of an urge to rein in risk Monday. As stocks sold off, a Goldman Sachs basket of hedge funds’ most-favored stocks underperformed the S&P 500. Meanwhile, a similar index tracking the industry’s most-hated stocks outperformed, pointing to some reluctance to bet on lower share prices.

“All speaks to raising cash and degrossing,” said Danny Kirsch, head of options at Piper Sandler & Co. “Sentiment is just super crummy.”

For some rules-based funds, the volatility spike in and of itself was enough reason to pull back. To others, the decline that sent the S&P 500 below one key trendline after another and pushed European stocks into a bear market was a sign to cut exposure.

All told, macro systemic strategists, including volatility-targeting funds and trend-following commodity trading advisors, have dumped $200 billion of global equities since December, according to data compiled by Morgan Stanley’s trading desk.

--With assistance from Melissa Karsh.

This article was provided by Bloomberg News.