Maximus

Thursday, November 5th, was a day of extremes: •US long/short Hedge Fund net leverage declined by 5% day over day, the 5th largest single-day decline since 2010. Net leverage is now in the bottom decile since 2010.^ •Long/short fund active gross flow since June has amounted to a -10.7% reduction relative to their gross market value at the end of June, the most in at least 10 years.^ •Hedge Funds are now underweight AI stocks* relative to market cap weights, but AI is still a very large percent of absolute exposures at 32%.^ •Levered ETFs had the largest amount to sell on data going back to 2007, bringing $57bn of US equity supply. •Retail selling of US equities in the first 90 minutes, based on MS QDS estimates using public data, was the second largest going back to 2016. •Equities are now starting to trade in a more correlated fashion, often signaling that risk reduction is broadening out. ^Sourced from MS Prime Brokerage. *AI stocks defined as the constituents of the MSXXAI Index, made up of AI tech beneficiaries, AI power names, and key hyperscalers

Today’s equity selloff is expected to create significant supply. Levered ETF rebalancing today should create $52bn of US equity for sale if prices at November 5th, 1pm, hold through the close on MS QDS estimates – that’s second only to the $55bn sold on June 5th, 2026. Semiconductors will bear the brunt of that supply, where there should be $21bn for sale, with NASDAQ 100 seeing another $15bn for sale.

Yesterday we highlighted that the volatility market was pricing a small potential move in the S&P 500. The index ended up 1.6% on Nov 4th, well beyond the 1.2% move implied by the volatility market. The Momentum factor* fell more than 6%, placing in the bottom 1% of all daily returns in at least a decade. Prior winners fell almost as much as prior losers rallied. Semiconductors fell below July lows while Consumer Discretionary outperformed Energy by over 9%. Remarkably, the Beta factor* is down almost 3% despite the sharp rally in equities. This comes on the back of its worst month in 15 years, with Beta falling 22% in October. YTD stats are striking. Beta is down 11% and Momentum 14%, while the S&P 500 is up 12%. The simultaneous selloff in Beta and Momentum has echoes of July, but the drivers are different. July was the worst month for Momentum in 15 years, driven by a positioning unwind as investors sold prior winners. October was the worst month for Beta in 15 years, driven by a broader macro shock as tightening financial conditions punished high-volatility stocks. * Morgan Stanley Institutional Equity Division is measuring Momentum here as the performance difference between the top 200 outperformers vs. the bottom 200 underperformers of the Russell 3000 over the past 12 months with a 1-month lag. Beta is measured as the performance difference between the top 15% of liquid Russell 3000 members based on 6 and 24-month betas and the bottom 15% on the same metric.

Implied volatility markets are not pricing midterm results to be a big event. The forward volatility market is implying just a ~1.2% move in the S&P 500 Index tomorrow. That’s below what was implied one day ahead of 3 of the last 4 midterm elections. And it’s below what the S&P 500 realized after the 2018 and 2022 elections.

Today marks only the 2nd day this year that retail investors have been net sellers. MS QDS estimates, based on public data, that retail investors sold $1.4bn of US equities today — their first net sale since April. This is after retail has bought more than $1 trillion of ETFs and stocks YTD.

The unwind in Hedge Fund equity exposures this year has been the biggest since at least 2017. Active de-grossing (reduction in long + short positions) by global hedge funds has now hit over 8% of total gross exposure since June, according to the Morgan Stanley Prime Brokerage Content team. This has taken gross leverage for US long/short funds down to the 10th percentile versus the last year.

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