A Goldman Sachs executive warns that high levels of market leverage could lead to volatility in the artificial intelligence and semiconductor sectors.
Shawn Tuteja, a director overseeing volatility trading in ETFs and custom baskets, say in a new interview that the market is underestimating the potential for two-way volatility.
“What concerns me a little more about the market right now, especially the semiconductor and AI story, is how much leverage there is in the system. There are a lot of leveraged ETF products that have been launched that give you double exposure to semiconductors or triple exposure to semiconductors. And those products are inherently what we call short gamma products. This means that in order to maintain their constant leverage on days when the underlying asset goes up, they have to buy a lot on the rebalance. And on days when it goes down well, they have to sell a lot.
The reason that concerns me is that as leverage increases and as positioning and exposure increases, there may come a point where something fundamental emerges that is negative and a stock should fall 3%. But because of all these deleveraging forces that exist in the market, 3% on the downside can turn into 10% very quickly. Just as we have seen it become positive.”
Tuteja notes that while he expects volatility, he does not believe the market is in a bubble.
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