• Hedge funds are hedged, not out. The book is still fully deployed, but the way it is held has quietly shifted to the most defensive setup in a year.

• Bonds are where the asymmetry sits. Systematic positioning is one-sided across the entire government bond complex, and the risk is not where most expect.

• The calm is doing more work than it looks. Vol is pinned near multi-year lows, but the mechanics holding it there are thinner than the tape suggests.

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Portfolio Manager’s Summary

Hedge funds are stripping out directional risk without shrinking the book. Gross leverage rose to 207% while net fell to 47.6% and the long/short ratio slipped to 1.597, both in the bottom 1% of the past year. The short book grew twice as fast as the long book. Funds covered index and ETF shorts but sold single stocks at 3.3 shorts to every long, rotating out of defensives into cyclicals.

Systematic Strategies

Our CTA model tracks systematic positioning across ~70 global futures markets. The standout this week is bonds: every government bond market now screens short, which implies the balance of risks is somewhat asymmetric. Further weakness should generate relatively modest incremental selling, while a sustained rally would force a more meaningful unwind of existing shorts and provide a mechanical tailwind to bonds.

CTA Positioning (SPX)

CTA length in US equities has rebuilt to roughly $52Bn after the spring flush to -$22Bn, though it sits below the ~$65Bn peak earlier this year even with the S&P at highs. Triggers still sit ~5% below spot on ES and ~4% on NQ, leaving a cushion before mechanical selling kicks in.

Vol Control Funds (SPX)

Vol control allocations have stalled near $185Bn, well below the ~$295Bn peak, and have gone quiet as realised vol sits depressed. The 10-day high/low band has compressed to 0.52%, close to the lowest since 2021, leaving room to re-lever if the calm holds.

Gamma & Liquidity

Top-of-book depth

Depth thinned into Friday from the mid-August highs, and the two venues diverged: ES still sits above its 1y average at $10.9mm (58th %ile) while NQ has slipped below at $1.1mm (36th %ile). Consistent with market makers pulling size ahead of Warsh's first Jackson Hole keynote.

Gamma

Realized vol sits at 8.2% against GEX of $4.5B, placing the market in the flat region of the curve where dealer hedging still compresses moves. The cushion is thinner than the calm implies, since convexity only bites as gamma approaches zero.

Cross-Asset Positioning

CFTC Update

Equities: AMs held their S&P long, trimming just 7k. LFs added 34k to the ES short, which still sits above its 52-week average. Russell LFs are the standout, 1.6 SD below average after building 23k over four weeks, with a modest 2k cover into the latest print.

Rates: AMs stayed long but shrank the book, cutting 110k and adding back 47k. Long Bond took the hit, down 76k in a 2 sigma week, while 2y sits 2.4 SD below its 52-week average. LFs covered across the curve, Ultra 10y the exception, leaving 2y at +2.8z.

Gold: Managed money added 3k to a 145k long, extending a 25k build over four weeks. Swap dealers took the other side, adding 16k to a 245k short at -2.1z. Producers leaned the same way in smaller size.

Non-Dealer

Non-dealer net snapped back +28k w/w to 63k ($36.9Bn), completing a +72k three week rebuild from the 4 August washout, the second largest since 2020. That lifts positioning to the 83rd percentile since 2020, though only the median of the past year. The asymmetry is gone; length is neutral rather than cheap.

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Disclaimer: This publication is produced by Sophos Alpha for informational and educational purposes only and is intended for professional and institutional investors. Sophos Alpha is not a registered investment adviser or broker-dealer. Nothing here is investment advice, an offer or solicitation to buy or sell any security, or a recommendation of any strategy, and no content is tailored to any individual's objectives or circumstances. Investing involves risk, including loss of principal. Past performance and modelled or backtested results do not indicate future results. Positioning figures are model estimates derived from public and proprietary data, are subject to revision, and may differ materially from other providers. Sophos Alpha and its personnel may hold positions in the instruments discussed. Conduct your own research and consult a qualified adviser before investing.

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• Equities are grinding to new highs with an unusual signature: realized volatility on up days is now dominating down days by the widest margin since 1986, a 100th percentile reading for both the S&P 500 and Nasdaq, meaning the rally itself is happening in a volatile, reflexive way rather than a calm one.

• Systematic flows are reinforcing the move but from different starting points. CTAs are already comfortably long with de-risking thresholds far from spot, while vol-control funds are still rebuilding exposure off recent lows and have real room left to add if realized vol stays contained, alongside hedge funds net buying equities at their second fastest pace of the past year.

• Broader positioning data shows speculative money is still underexposed to the rally. Leveraged funds remain net short equity index futures and short duration in rates, and Nasdaq futures positioning only just flipped back to net length after briefly turning negative, suggesting there’s still room for further chasing if the trend holds.

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Portfolio Manager’s Summary

US equities made new all-time highs last week with the S&P 500 finishing up another +0.4% amid a string of benign inflation prints (CPI, PPI,Retail Sales, U Mich), broad earnings strength, and relative AI optimism.

The ratio of realized volatility on up days versus down days for the S&P 500 and Nasdaq 100, and it’s currently sitting at the highest level since 1986, a 100th percentile reading for both indices.

In plain terms, when this market rallies, it rallies with more turbulence than when it sells off, a complete reversal of the historical norm where down days are typically the volatile ones.

Institutional & Systematic Positioning

HFs net bought US equities every day this week and at the second fastest pace in the past year, driven by long buys in Single Stocks and to a lesser extent short covers in Macro Products as ETF shorts were net covered for a 6th straight week.

Systematic Positioning

Systematic positioning across equities remains comfortably long, with global equity exposure sitting well above neutral. The thresholds that would force meaningful de-risking are still far from spot, roughly 6% away for both the S&P 500 and Nasdaq, meaning price would need to fall considerably further before CTA trend-following models are forced to start selling.

Vol Control Funds

Vol-control funds have rebounded off the recent lows, with implied allocation climbing back up but still well short of the peak hit late last year. Unlike CTAs, which are already sitting near max invested with de-risking thresholds far from spot, vol-control funds still have meaningful room to add exposure, conditional on realized volatility staying low enough for their target-vol formulas to keep scaling up.

Institutional Positioning

CFTC Update

Across the CFTC’s disaggregated COT report, speculative positioning remains broadly cautious even with risk assets near highs. Leveraged funds are running a net short book in equity index futures, hold a heavily short duration position across the Treasury curve, and stay defensively positioned in short-term rates, while commodity and FX exposure looks more mixed and asset-class-specific rather than showing a single directional theme. Taken together, it points to speculative money still under-positioned relative to the rally, leaving room for further chasing if the trend holds.

Meanwhile, Non-dealer net positioning in Nasdaq futures turned negative for the first time since May 2025, following a record weekly decline in the first days of August, even as the index staged a sharp rebound over that same stretch.

New shorts drove the initial move, but the flow has since reversed: short covering dominated in the days right after, followed by a more substantial build in fresh length as the market kept grinding higher. That shift has also shown up in funding, with Nasdaq’s three-month basis richening consistently on both an outright and relative basis since positioning bottomed, consistent with real length being added into the rally rather than shorts simply being squeezed out.

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Disclaimer: This publication is produced by SophosAlpha for informational and educational purposes only and is intended for professional and institutional investors. SophosAlpha is not a registered investment adviser, broker-dealer, or financial professional in any jurisdiction. All views expressed are the opinions of SophosAlpha as of the date of publication, are subject to change without notice, and should not be construed as financial advice. Nothing herein constitutes investment advice, an offer or solicitation to buy or sell any security, or a recommendation of any investment strategy or product, and no content is tailored to the objectives or circumstances of any individual recipient. Investing involves risk, including the possible loss of principal, and strategies referenced may involve derivatives, leverage or short exposure that can amplify losses. Past performance and modelled or backtested results are not indicative of future results. Positioning figures are model estimates derived from public and proprietary data, are subject to revision, and may differ materially from other providers. Third-party information is believed reliable but has not been independently verified. SophosAlpha and its personnel may hold positions in the instruments discussed. Investors should conduct their own research and consult a qualified financial advisor before making any investment decisions.

• Trend followers trimmed US equity exposure last week without any US market crossing its trigger, while the DAX and BIST 30 have already downgraded to Neutral. The cohort remains long and the bulk of any mechanical selling is still ahead of it.

• Vol control funds have rebuilt equity exposure over recent weeks on the back of suppressed realized vol. That rebuild flips into a mechanical headwind the moment realized vol re-rates.

• Per Goldman Sachs Prime, hedge funds were marginal net buyers of US equities last week, buying single stocks while shorting macro products. Gross leverage slipped and now sits near the low end of its one-year range, with the rotation running into Energy for a sixth consecutive week and out of Consumer, where positioning is close to multi-year lows.

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Institutional & Systematic Positioning

The S&P 500 fell -0.6% last week as investors navigated rising macro uncertainty, with geopolitical escalation in the Middle East pushing rates and oil prices higher alongside a less constructive EPS season so far.

The question this week is who still has exposure to sell. Systematic strategies sit high in notional terms, with both trend models and vol control funds carrying meaningful long exposure into a market that has stopped going up. Discretionary money is already moving the other way, with asset managers cutting net length in US equity futures last week. Below we work through each cohort and what it would take to turn that positioning into supply.

Systematic Strategies

Signals still read Long across the Americas, but conviction faded over the week. The S&P 500 and Russell 2000 saw exposure trimmed while their signal states held, and the only outright downgrades came in Europe, where the DAX and BIST 30 moved to Neutral. Global CTAs therefore remain long, just less convincingly so. The distinction matters because these models do not exit gradually. Signal states are discrete, so a market sitting on Long with declining exposure is one threshold away from flipping, and the flip arrives as a step change rather than a drift. Sell-side trend models are pointing the same way, with the shortest lookback window carrying the heaviest signal weight and sitting closest to its trigger.

CTA Positioning

Aggregate CTA exposure in US equities has come off its early-July high but remains firmly long and nowhere near the negative readings seen in last year’s and this spring’s drawdowns. This cohort has trimmed at the margin and has not meaningfully de-risked. That is the setup to watch, because the selling is conditional. If volatility stays elevated long enough to drag price through the model’s key lookback window, the same positioning that has been a tailwind becomes a sizeable and price-insensitive supply of futures.

Vol Control Funds

Implied notional allocation has jumped sharply over recent weeks as realized vol collapsed. These strategies size on trailing realized volatility, so the rebuild is backward-looking by construction: exposure was added because volatility had been low, not because risk was low. The higher the allocation climbs, the larger the notional that has to come back out on a vol shock, which makes this cohort a live headwind from here rather than a support.

Institutional Positioning: CFTC Futures

Asset managers cut net length across every US equity contract last week. The largest reductions came in the S&P 500 and Russell 2000, and while the S&P 500 book remains substantially long, the Russell 2000 has now tipped to a marginal net short. Goldman Sachs Prime corroborates the futures data, with asset managers finishing the week as net sellers. Real money is already reducing beta while the systematic cohorts have barely started.

• Based on key momentum signals, CTAs likely remain broadly long global equities.

• Asset Managers bought Nasdaq 100 futures last week and added significantly to US Fixed Income across tenors.

• Leveraged Funds cut shorts in Nasdaq 100 and increased shorts in S&P 500 and S&P MidCap 400.

• Vol-control funds raised their equity exposure to the highest in four months

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Institutional & Systematic Positioning

Last week we had noted that equity positioning had been rising but was still underweight even as the market hit new highs. This week, positioning has continued to rise and is approaching neutral but is still a little shy of it.

Discretionary investors have turned slightly overweight while systematic strategies remain a little underweight. Systematic triggers that determine allocations are far below current levels in the SP&500. Overall, we still believe we are far from “max long” and the market, despite the recent headline fear, has room to continue higher.

Systematic Strategies

According to our model, short-term trend followers already have meaningful S&P 500, NASDAQ-100, Russell 2000, and Nikkei 225 longs while medium- and long-term models lag with smaller longs in the case of Russell 2000.

CTA Signals

CTAs increased their overall equity long positions this week. In the US, they increased long positions in the S&P 500 and the Nasdaq 100.

Systematic Positioning

Systematic strategies remain slightly underweight, and they are far from being max long, suggesting that there is still significant room for increased exposure within this cohort.

Vol Control Funds

Vol-control funds raised their equity exposure to the highest in four months and are approaching extreme levels as vol-compression continues.

Institutional Positioning

Asset Managers bought Nasdaq 100 futures last week and added significantly to US Fixed Income across tenors. Leveraged Funds cut shorts in Nasdaq 100 and increased shorts in S&P 500 and S&P MidCap 400.

CFTC Update

Non-dealer net positioning shows increased longs in both S&P500 and Nasdaq last week although on a much higher rate on Nasdaq, highlighting that the breadth of this rally is very narrow.

The median constituent remains more than 10% below its 52-week high, leading to one of the narrowest readings of market breadth in recent decades.

Disclaimer: Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The information provided is for informational purposes only and does not constitute investment advice, an offer to buy or sell securities, or a recommendation of any investment product. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.

• US L/S Gross leverage saw the largest decrease since early April, while Net leverage increased, suggesting Fundamental L/S managers reduced short exposure.

• Vol control strategies are likely to continue adding exposure as realized vols decline.

• Across sectors, positioning remains underweight in most, except for Utilities and Consumer Cyclicals.

• Equity positioning has risen significantly off the bottom but is still far below February levels.

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Institutional & Systematic Positioning

There’s still plenty of disbelief. Options flow shows persistent downside hedging. Fund managers remain underweight risk. SP500 breadth is stuck since May.

But this is what defines a squeeze phase: a market that climbs precisely because it’s unloved.

With geopolitical fears abating, discretionary investors reversed last week’s dip and are now at slightly positive levels, while Systematic strategies also raised exposure but remain underweight.

On our previous institutional monitor, we reiterated positive forecasting for systematic strategies in the U.S. and underweight institutional positioning, skewing the risk to the upside. Nothing has changed. Ever since that post, the market has seen continuation and reached all-time highs.

Looking at hedge fund leverage — gross has finally pulled back from highs, probably due to option expiry — and nets march higher but are far from extreme. There is absolutely nothing here that could prevent a further rally from a flows perspective as the positioning is far from stretched.

Systematic Strategies

We expect systematic strategies to continue grinding higher in a baseline scenario, with approximately $80 billion of estimated global buying ($44 billion in the U.S.) over the next month.

CTA Signals

While not all global equity signals are positive, the biggest markets generally are, and the renewed move higher has put more “breathing room” before more meaningful potential sales would manifest — the SPX short- and medium-term areas in particular are not until around 5890-5830 currently.

Our models indicate that most CTAs, regardless of model speed, will be long S&P 500 and NASDAQ-100 futures by the end of next week.

Systematic Positioning

Systematic strategies also increased their positioning slightly but remain underweight and well below levels at Feb peak.

Vol Control Funds

Vol control funds increased their equity allocation marginally this week, while their sensitivity to market selloffs has declined. They are likely to continue adding exposure as realized volatility declines.

Institutional Positioning

Asset managers’ buying stalled last week on the S&P 500 and Nasdaq, while leveraged funds saw increased exposure w/w. Dealers increased shorts on U.S. equities, indicating increased longs from buy-side investors.

CFTC Update

Equity positioning has risen significantly off the bottom but is still far below February levels and remains underweight. Tech has seen a reversal in non-dealer positioning after bearish funds were initially forced to buy back after U.S. china deal while S&P500 still lagging behind.

WHO is buying?

If positioning is still underweight and inflows are only modest, how are equities back to all time highs?

This is mainly due to strong and ongoing share buybacks, as companies continue to confidently deploy their capital rather than holding back. We see expectations of S&P 500 buybacks to total around $1.1 trillion this year.

Disclaimer: Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The information provided is for informational purposes only and does not constitute investment advice, an offer to buy or sell securities, or a recommendation of any investment product. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.

• Last week we saw continued strong buying in energy-related products on

  Middle East tensions.

• We saw additional large net buying in KOSPI 200, SSE50, Korea 10y, WTI, and Aluminum futures, but large net selling in Euro Stoxx 50, SMI

• Based on key momentum signals, CTAs likely remain broadly long US

  and Asia equities, but have mixed exposures in Europe.

• Dealers’ ES short positions decreased further last week indicating reduced longs from buy-side investors.

• US equities saw strong inflows with institutional clients led the buying for the first time in seven weeks.

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Institutional & Systematic Positioning

Momentum remains positive, but has been trimmed. CTAs stay net long, especially in U.S. and Asian markets. European equities, the most extended longs, saw the largest reductions past week.

Non-dealer net positioning on the S&P500 continues to remain depressed. This suggests that institutional clients and leveraged funds are nowhere near stretched positioning despite the market reaching the ATHs. There is a tremendous amount of cash in the sidelines.

Systematic Strategies

CTA Signals

CTAs continued to increase their long positions in equities, taking them to the highest in over three months, primarily by raising exposure outside the US but trimmed their shorts in the Russell 2000.

CTAs likely remain broadly long US and Asia equities, but have mixed exposures in Europe. CTAs likely remain long the front-end and short the long-end in US rates, long EMEA rates, and have mixed exposures in APAC.

CTAs Exposure (U.S.)

We see estimates that CTAs are long $75bn of global equities after selling 3.3bn last week. In the US, we see this cohort long 21bn.

We are far from stretched positioning to the upside and we see their selling moving average thresholds below 5900 (SP500) before they start to scale into any meaningful selling.

Vol Control Funds

After a brief spike in vol last week, which has done little to sustain any meaningful pullback, vol control funds increased their equity exposure this week as vol continued to compress lower.

Institutional Positioning

Based on the latest CFTC-COT Positioning, Dealers’ ES short positions decreased further last week, indicating reduced longs from buy-side investors. Leveraged Funds increased shorts in RTY.

Institutional positioning across 3 key indices has continued to rebound from April lows but still remains light on a 1-year lookback.

We are nowhere near stretched positioning in the U.S., which could suggest that despite a new ATH being ahead of us, senior money has not added any meaningful exposure back to the U.S. in scale.

Asset Managers + Leveraged Funds (% of OI), continue to decrease despite the rally across key U.S. indexes, indicating a recent decrease in net long positions.

Disclaimer: Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The information provided is for informational purposes only and does not constitute investment advice, an offer to buy or sell securities, or a recommendation of any investment product. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.

• Following the sharp escalation in the Middle East, we saw strong

  buying in energy-related products, including >2z buying in WTI futures

• CTAs likely incrementally sold in several equity markets w/w but remain broadly long global equities.

• Dealers’ ES short positions decreased significantly indicating reduced longs from buy-side investors w/w.

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Institutional Positioning & Flows

Buying driven by risk appetite and momentum on the long side as well as by covering on the short side has waned over the last 3 weeks, consistent with discretionary investors staying actively near neutral.

But why then had the market been grinding higher? We see it as reflecting rising equity exposure for systematic strategies on the back of lower vol, and continued strength in corporate stock buybacks.

Despite the significant bounce from April lows, we see professional investors being significant under invested in the U.S. markets.

Systematic Strategies

Systematic strategies continue to raise their exposure slowly, but remain underweight.

Backward-looking vol signals continue to be impacted by the April vol shock, and as it recedes from the relevant lookback windows, we expect systematic strategies to continue to raise exposure.

CTA Monitor

Based on key momentum signals, CTAs likely incrementally sold in several equity markets w/w but remain broadly long U.S. equities. CTAs were likely forced to cover shorts in Oil after the escalation in the Middle East.

Last week, we warned that the positioning of CTAs on crude oil was rather stretched, which was why we saw the sharp spike earlier this week after the escalation.

By using a proxy strategy, we believe vol control funds increased their equity exposure further, now back to early April levels.

Institutional Positioning

CFTC: Positioning Dealers’ ES short positions decreased significantly (+1.9z), indicating reduced longs from buy-side investors w/w.

Institutional positioning across these 3 key indices has rebounded from April lows but still remains light on a 1 year lookback.

Disclaimer: Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The information provided is for informational purposes only and does not constitute investment advice, an offer to buy or sell securities, or a recommendation of any investment product. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.