On the eve of the U.S. election, the market is unusually calm, while hedge funds show a cautious wait-and-see attitude.The policy positions of the two candidates differ greatly, making the market's calmness seem eerie. Goldman Sachs trader Brian Garrett pointed out last week that the implied volatility on election day is only 2%, the lowest reading since Goldman began tracking the relevant metrics. He stated, “This number might be a bit too low.”<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/ed8a2b76-009d-497a-87e6-cf6768181a30.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/ed8a2b76-009d-497a-87e6-cf6768181a30.png"/>Last week, some analysts pointed out that the sharp decline in implied volatility may be due to a drastic drop in liquidity before the election, a view that was later confirmed by Goldman Sachs.<h2>Significant Decrease in Leverage, Overall Still Net Buying</h2>Goldman Sachs Prime data shows that due to the net leverage ratio (a risk preference indicator measuring long positions against short positions) declining at the fastest rate since the banking crisis in March 2023, the total leverage of hedge funds has significantly decreased.At the same time, last week, the total leverage ratio in the U.S. hit its lowest level since March 2023, while the change in net leverage ratio was relatively small. Goldman Sachs believes this indicates that the net leverage ratio is declining and leaving some funds available before the U.S. election.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/96c5b0c7-c4f9-4154-b824-d3876d8eade5.jpeg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/96c5b0c7-c4f9-4154-b824-d3876d8eade5.jpeg"/>However, even in the case of a significant drop, the U.S. stock market was still in a net buying state last week, with the number of long buy trades nearly double that of short sales, at a ratio of 1.9:1.<blockquote>Among them, macro products (including indices and ETFs) accounted for nearly 80% of the net buying in the U.S., with the number of buy trades more than double that of short sales, reaching 2.2:1.Short positions in U.S. listed ETFs increased for the second consecutive week, rising by 3.1%, marking the largest single-week increase in three months, primarily driven by increases in short positions in large-cap stocks, corporate bonds, and sector ETFs.Individual U.S. stocks saw slight net buying for the fifth consecutive week, with the amount of buy trades being 1.4 times that of short sales. The sectors with the highest net buying in the U.S. were industrials, utilities, and consumer staples, while the sectors with the highest net selling were consumer discretionary, communication services, and information technology.</blockquote><h2>Seasonal Bullishness Will Begin to Take Effect</h2>Despite the overall buying trend in the market, TMT stocks experienced the largest net selling volume in five weeks during a week filled with earnings reports from tech giants, primarily driven by short selling and a smaller degree of long selling. Software, entertainment, electronic devices, instruments and components, as well as interactive media and services were the sub-industries with the most net selling, while technology hardware and IT services were the sub-industries with the most net buying.It is noteworthy that hedge funds have been unwinding recently established positions in the U.S. consumer discretionary sector for the fifth consecutive week, with long selling outpacing short covering by a factor of 2. Among them, household durables, hotels, restaurants and leisure, as well as textiles, apparel, and luxury goods were the sub-industries with the most net selling, while department stores and automobiles were the sub-industries with the most net buyingIn addition, data shows that from a liquidity perspective, long positions net sold approximately $10 billion of U.S. stocks (with about 50% of total sales in the technology sector). Prime Brokerage also commented that the stock sales department did not see large-scale sell-offs from hedge funds this week.However, analysts believe that the pre-election sell-off is understandable, but seasonal bullishness will begin to play a substantial role:<blockquote>“If volatility resets after the election and the Federal Reserve ends, then systematic strategies will generate huge demand, and stock buybacks will bring $6 billion in demand daily in November. Specifically, the stock sales department is optimistic about financial/value/transportation/industrial (short-term momentum themes), and PB data continues to show investor demand for cyclical stocks since early October.”<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/68258a86-ad9a-4505-9000-a03aa76d4892.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/68258a86-ad9a-4505-9000-a03aa76d4892.png"/></blockquote>

Data shows that market liquidity sharply declined before the election, with net leverage decreasing at the fastest rate since the banking crisis in March 2023, and the total leverage of hedge funds significantly decreased

- Ahead of the U.S. elections, market calmness contrasts with significant policy differences between candidates, with Goldman Sachs noting a record low implied volatility of 2%.  
- Hedge funds have reduced net leverage rapidly, reflecting cautious positioning, while the U.S. stock market remains in a net buying state, particularly in macro products.  
- Despite recent sell-offs, analysts expect seasonal bullish trends to emerge post-election, with substantial stock buyback demand anticipated in November.

Reduce leverage and leave funds available! Hedge funds "stand aside and observe" before the U.S. election