but what does that even mean?
Gamestop, Reddit and de-grossing were three words bandied about a lot this past week, some mainstream investors may have been familiar with at least one of those words previously – here we’ll take a closer look at ‘de-grossing’.
Hedge funds are gross, that much is the common knowledge, but, what does it mean when someone says a hedge fund is ‘de-grossing’?
The phrase has been used a lot in the wake of the Reddit ‘short-squeeze’ on GameStop stock, so a fuller explanation is warranted.
To get to the nub of ‘de-grossing’ and give insight to impact that has on share prices, let’s take a quick step back.
Hedge funds make high risk bets for wealthy investors.. To achieve glitzy returns, hedge funds have a number of plays in their book – among them, the most familiar to most would be leveraged trading and by short selling.
Leveraged trading is basically betting with more money than you actually have, whilst short selling essentially means selling shares that you don’t actually own. It helps to add some method to what some might call madness.
Gross exposure and net exposure
Gross exposure and net exposure are snapshots that indicate the basic riskiness of a fund’s trading book.
As a simple monetary measure of what’s staked, gross exposure comprises the total value of all open long (buy) trades plus the value of all its short (sell) trades.
For example, a fund would have US$220mln of gross exposure if it had US$100mln of long positions and US$120mln of short positions.
Net exposure meanwhile adds some direction. It is calculated as the sum of long positions minus its shorts – for example, U$100mln of long positions and US$120mln of short positions, sees the fund ‘net short’ by US$20mln.
Right, so what does de-grossing mean?
Typically, you’ll see the phrase in the news against a backdrop of market panic and volatility.
Most other utterances are kept among the bean-counters, compliance and the regulators.
So then, it will most likely mean the clipping or closing of open trades – likely as quickly and cheaply as possible.
But here’s the rub. Hedge funds will probably want to avoid closing the big losing trades. Such a concession may carry existential risk (for the fund along with the egos and reputations of the fund managers that run them).
Instead, they’ll take out other positions – short or long.
Hedge funds don’t make their bets in a vacuum. One sell order dominoes into the next. A trade in one stock soon impacts upon a trade in another.
Ultimately, it means a broad sell-off across the market, beyond whichever highly leveraged tit-for-tat spawned the process in the first place (see this week’s example: GameStop).
According to and the hedge fund industry has been de-grossing at scale in order to cope with the Reddit stock-buying insurgency.
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