Citadel Securities: Systematic Funds Prepare to Leverage Up and Buy Stocks

Scott Rubner, Head of Equity and Derivatives Strategy at Citadel Securities, stated that the reset of leverage in the U.S. stock market is largely complete. As volatility declines, the space for systematic strategies to increase equity exposure is expanding. The breadth of the market rally is improving, correlations are nearing historical lows, and investors are willing to pay a premium for upside potential. The next round of mechanical capital flows may involve re-leveraging rather than continuing to deleverage. Data from Citadel Securities shows that the assets under management of leveraged ETFs have decreased from $218 billion at the end of June to $154 billion in July, a drop of nearly 42%, with semiconductor leveraged ETFs accounting for about $31 billion. The Morgan Stanley Prime Brokerage team has also observed a similar trend, noting that after record deleveraging at the end of July, funds began to restore capital and re-enter global equities last week.