from ZH with my notes in [brackets]
[1. Leverage of 5:1 causes back office risk managers to require selling after samll losses]
"market-neutral" and steady money makers as their managers tend to run portfolios with a roughly equal weighting of longs and shorts, or small net exposure in either a bullish or bearish direction, while "neutralizing" style, factor and sector biases.
Alas, as November showed, these mandates tend to crowd the firms - whose PMs have usually "been around the block" and have worked at all the same companies - into the same trades.
Furthermore, because individual PMs are typically forced to sell positions after relatively small losses by their back office risk controller, the firms are forced to employ massive leverage to capture upside. As a result, while Citadel, Point72 and Millennium together hold less than $100 billion in net assets, that number rises to almost half a trillion dollars when leverage is accounted for is included in the firm's "regulatory capital".
[2. market neutral selling forces multi-managers to sell]
And thus - as Bloomberg notes - began the cycle of liquidation at the multi-manager firms, as individual PMs or teams hit their risk limits, forcing them out of various positions and beginning a cycle of losses and further sales.
[3. further selling if market fails to stabilize]
That could mean more selling and additional losses if markets fail to stabilize in the coming days, especially because hedge fund managers traditionally deleverage further at the end of the year.
source:
https://www.zerohedge.com/news/2018-12- ... onths-ever