Tech earnings season is putting hedge fund dispersion trades to the test, as traders await key semiconductor and AI company results to gauge whether single-stock volatility will rebound. Dispersion strategies, which involve going long single-stock volatility while shorting index volatility, have suffered drawdowns as both implied and realized volatility spreads have compressed. Traders are anxious for surprises in AI demand and semiconductor capex that could trigger share price swings.
Alexis Maubourguet of Adapt Investment Managers noted that strong past performance led to rebuilding positions after a July pullback, but those positions are now underwater. He added that the conviction to pay high premiums for upside calls has faded, undermining the trade’s foundation. Risk managers are concerned as correlation remains subdued despite falling volatility, unlike in past macro-driven drawdowns where rising correlation justified holding positions.
The current environment makes it harder to justify maintaining dispersion trades without meaningful earnings-related moves. However, options are still pricing in significant one-day reactions to tech earnings, near post-Covid levels, which may keep funds invested. Some see the volatility drop as a better entry point.
Herve Guyon of Societe Generale said investors in tech-heavy baskets are likely to wait through earnings season before adjusting exposure. Premialab data shows tech-focused QIS dispersion strategies have been hit hardest, suggesting the pressure is specific to technology-heavy baskets.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing