HedgeCo.Net — Hedge funds running equity dispersion strategies are looking to the coming technology earnings season to revive single-stock volatility after a decline in share-price swings left some positions with mark-to-market losses, Bloomberg reported.
Dispersion trades typically buy options on individual stocks while taking an offsetting short position in index volatility, profiting when constituents move independently rather than together. Earnings season is usually a favorable backdrop, because company-specific results tend to outweigh macro drivers such as rates and oil. Results from major semiconductor and artificial intelligence companies are expected to be a key catalyst.
Alexis Maubourguet, chief investment officer of Adapt Investment Managers, said dispersion positions had been rebuilt aggressively after a pullback in July, encouraged by strong recent performance, and that those positions have since moved against investors. He said the market’s appetite for paying high premiums for upside calls on tech stocks has faded, compressing both implied and realized volatility spreads.
The current drawdown differs from earlier episodes. Correlation between stocks has stayed low even as volatility has fallen, whereas in past macro-driven losses a jump in implied correlation did much of the damage. Even so, options are pricing in some of the largest one-day earnings reactions since the pandemic, which may persuade funds to stay in the trade, and some investors see lower volatility as a better entry point. Premialab data cited in the report shows tech-focused quantitative dispersion strategies have been hit hardest.
For allocators with exposure to volatility and relative-value managers, the next several weeks should show whether the recent losses were a temporary squeeze or a sign the trade has become crowded. A strong round of idiosyncratic earnings moves would help repair performance, while another muted season would raise pressure on managers to cut exposure.