Goldman Sachs warns of trend-following funds slashing exposure as blistering stock-market rally loses steam
The blistering rally in the stock market may be losing steam as trend-following funds, known as CTAs, are expected to reduce their exposure to global stocks, potentially dumping over $200 billion. These funds had aggressively increased their exposure in November, but now their flow-of-funds dynamics have run out of gas. Goldman Sachs warns that if prices start to slip, CTAs could reflexively sell off their exposure, leading to a rapid acceleration in the market downturn. However, equity options to protect against a potential selloff are currently cheap, providing an opportunity for traders to hedge their portfolios.