Flows & Liquidity
Bottoming out?
Our overall equity positioning metric points to significantly lower equity positioning currently from the recent peak in mid-September. This suggests that while some of the near-term headwinds we noted last week remain in place, there has been some signs of adjustments in positioning that could start to limit downside from here. Neoclouds are neither a critical nor large segment of the overall AI ecosystem. Little sign of diversification flows out of the US at the aggregate level. While various US regulatory bodies enact rules to encourage institutional participation in the crypto ecosystem, somewhat offsetting the negative from the failure of the Congress to pass the Clarity Act, elevated political and legal risk premia are likely to persist over the longer term until comprehensive market-structure legislation is eventually passed.
The funding concerns around neoclouds (specialized AI infrastructure providers that rent out compute for AI workloads) have taken center stage over the past week. Is the funding model of neoclouds unsustainable? How important are neoclouds for the overall AI ecosystem? Are concerns about neoclouds threaten overall AI capex financing warranted?
Our colleagues in credit research covering publicly listed neoclouds (see Technology & Telecom Weekly by Egan et al.) have answered the first question: as funding costs via high yield debt markets rise for publicly listed neoclouds, they might need to become more inventive with their financing relying less on company debt and shifting more towards equity financing and project specific debt. And our colleagues in equity research note that while an increase in the cost of capital given concerns in debt markets and the rise in yields more broadly could limit headroom for return generation, the favorable demand backdrop for compute can also enable some passing on of the cost through to customers (CoreWeave, Chatterjee et al, Oct 16th).
But even in an adverse scenario where this thesis does not play out and eventually the funding model of publicly listed neoclouds becomes unviable because of the timing mismatch between their capex and revenues, we do not believe that the AI capex cycle will be derailed for two reasons.
First, publicly listed neoclouds are a relatively small segment of the overall AI ecosystem. From the roughly $2.2tr of cash flows (Figure 1) and $1.8tr of capex (Figure 2) projected by analysts for publicly listed tech companies globally for this year, neoclouds account for around $30bn and $80bn, respectively. In other words, the buildup of AI infrastructure by neoclouds could be absorbed by other tech companies with stronger balance sheets and more diverse revenue sources, such as hyperscalers.
Second, the tech sector overall is still running a financing surplus of around $400bn for this year as cash flows exceed capex. Therefore, at an aggregate level, the tech sector does not need external financing. And it might be able to run a surplus for years to come. Figure 3 shows that in a hypothetical scenario where the tech sector grows its capex by 25% a year in the five-year period to 2030, and grows its cash flows by 20% a year, there could still be a slight surplus by 2030.
Why is the tech sector issuing debt then? As shown in Figure 3, the tech sector is still deploying a large amount of share buybacks and it is mostly because the tech sector seeks to maintain these buybacks even as it undertakes more capex that is in need for external financing. In an adverse scenario where current funding concerns start spreading to other tech companies beyond neoclouds, tech companies would in principle be able to respond by postponing buybacks and engaging in more circular financing, i.e. the tech companies with financing surpluses such as chip makers to help fund tech companies with financing deficits such as neoclouds. In other words, by running a financing surplus in aggregate, the tech sector holds internal funding backstops.
And as we argued previously in our publication (see F&L August 20th) the AI capex and cash flow cycle is underpinned by spending on AI by large enterprises which based on surveys could reach $1.5tr globally this year.
It also important to put the latest correction in AI infrastructure stocks into the context of a higher frequency of semiconductor VaR shocks. As we argued in our publication last June (F&L, Jun 17th), since the second quarter of this year we have likely entered a new phase in equity markets where semiconductor VaR shocks would become more frequent even if the fundamentals of the AI cycle remain robust. This is because of the meteoric rise in the share of semiconductor stocks including memory stocks in overall equity markets. VaR shocks do not necessarily need to have a fundamental trigger, but rather often reflect positioning adjustments. A combination of two structural forces, rising equity allocation and low net equity supply, has helped induce lower equity volatility, meaning that investors with risk budgets such as VaR frameworks have tended to take larger positions when vol is low and are forced to cut positions as market vol rises, which can trigger self-reinforcing volatility-induced selling.
As we had noted in our previous publication, this rise in the market cap weight of semiconductors has made investors more exposed to this sector. But even this share in the market cap weight arguably understates the importance of semiconductors given the rise in volatility relative to the broader equity market. To estimate the share of risk capital taken up by semiconductors, we first estimate the shares of risk capital of each sector in the MSCI ACWI index as their share of market capitalization multiplied by its 6-month annualized volatility. For the information technology sector overall, the current share of risk capital in the broader MSCI ACWI index is at around 40% vs. its 28% market cap weight. And of this, the semiconductor industry group is around 21% vs. its 13% market cap weight, with Figure 4 showing how the risk capital weight of semiconductors has evolved over time. In other words, companies in the semiconductor index effectively consume around a fifth of the total risk capital in global equity markets.
And this vulnerability of VaR sensitive investors such as hedge funds and asset managers has been recently reflected in the closeness of their performance to the performance of semiconductor stocks. Indeed, when we look at the movements of semiconductor stocks (the SMH US ETF) and the HFRX equity hedge index of daily reporting equity hedge funds (which includes equity quant hedge funds), these movements have closely followed each other since late September (Figure 5), similar to what had taken place earlier this year from early April to late July. In the upswing this is indicative of elevated positioning among hedge funds, but in corrections given tight risk limits among hedge funds this increased co-movement can be indicative of forced de-risking that amplifies the drawdown. Given the recent declines in semiconductor stocks, we suspect that the previous overhang of elevated long semiconductor exposures has been largely unwound by hedge funds including momentum-based investors such as CTAs as shown in Figure 6. In addition, our overall equity positioning metric from our cross asset positioning monitor points to significantly lower equity positioning currently from the recent peak in mid-September (Figure 7). This suggests that, while some of the near-term headwinds we noted last week (F&L, Oct 14th) remain in place, there have been some signs of adjustments in positioning that could start to limit downside from here.
Little sign of diversification flows out of the US at the aggregate level
In the aftermath of the “Liberation Day” tariff announcement last year the question of diversification flows had emerged in our client conversations, and resurfaced this year amid tensions over Greenland and after the start of the Middle East conflict. How have these concerns played out in recent months?
The US TIC data currently covers 2026 up to August, depicted in Figure 8. It suggests that foreign purchases of both US equities and bonds have remained relatively strong in recent months. While the combined net purchases in July of $40bn were the weakest since the net sales in April 2025, August purchases rebounded strongly to around $300bn in total. Looking through the monthly volatility, the average pace of net purchases in 2026 to-date of around $75bn per month of equities and just under $85bn per month in bonds have both been stronger than their respective averages in 2025 of just over $60bn and just under $75bn per month respectively. In other words, there is little sign that fears over “de-dollarization” flows out of US assets have been translated into sustained outflows at the aggregate level.
What about cross-border flows more broadly? Figure 9 shows the net flows from the liability side of the US, Euro area and Japanese balance of payments, i.e. net purchases of portfolio assets by foreign investors for each economy. It suggests that similar to the US, looking through monthly volatility net inflows into European and Japanese assets have remained relatively strong overall YTD. For Euro area bonds inflows had been stronger YTD than for the full year 2025, though August did see some modest outflows before the widening in French spreads to Bunds began in earnest in September.
Where there has been some evidence of diversifying away from US assets is among FX reserve managers where the dollar share of reserves has declined. But this has been a long-standing trend, as shown in Figure 10. And at the aggregate level, when we look at total reserves, the main beneficiary has been gold.
Similarly, there had been some evidence of increased FX hedge ratios in 1H25 among Danish and Finnish pension funds (Figure 11 and Figure 12) and among Australian superannuation funds in 2H25 (Figure 13). But this year has seen a reversal among the Danish and Finnish pension funds’ FX hedge ratios, while for Australian superannuation funds the hedge ratios have been little changed.
More broadly, as we have noted previously (F&L, Jul 9th 2025) there is a strong link between hedging demand and the cross-currency basis. This suggests that if there is a significant increase in hedging activity, it should show up in the cross-currency basis. However, when we look at cross-currency basis swaps across major DM currencies (EUR, JPY, GBP, AUD, CAD and CHF) in Figure 14, the basis remains consistent with only a modest inclination to hedge dollar exposures.
Finally, there is little sign of increased demand for hedges via inflows into currency-hedged US equity ETFs domiciled outside the US relative to unhedged ETFs beyond early 2025 (Figure 15). If anything, since late April there have been proportionally larger flows into currency-unhedged US equity ETFs than currency-hedged ETFs have continued, even with the recent rise in the latter in early October.
Regulator-led measures can encourage institutional participation in the crypto ecosystem over the near term, but only legislation would make the framework more durable over the longer term
The Senate’s failure to advance the CLARITY Act on September 15th could have been a major setback for crypto markets. Instead, crypto market sentiment has stayed relatively constructive, even as passage this year now looks unlikely and hopes shift to 2027. In the meantime, attention has moved to what regulators can do now. Agencies such as the SEC, CFTC, and OCC are using existing authority to remove practical frictions that have kept many institutions on the sidelines. For markets, the key issue is less the precise legal label of the framework and more whether it creates workable, regulated channels for institutional participation.
The SEC is laying the groundwork for regulated tokenization. It is developing a pathway for tokenized securities, which are digital representations of traditional assets, through a proposed five-year Innovation Exemption. This would allow tokenized versions of listed equities to trade for longer hours, potentially 24/7, on tightly controlled venues, with faster settlement. Any token would need to preserve the same economic exposure and shareholder voting rights as the underlying stock. The scope, however, is intentionally narrow and excludes synthetic tokens. Venues would face limits on how many names they can support and how large token trading can become relative to the traditional market.
Importantly, issuers can opt out of having their shares tokenized. In recent weeks, we’ve seen more companies exercise this option. In turn, this dented sentiment for application tokens such as ethereum with outflows from ethereum ETFs (Figure 16) and a deterioration in its futures-position proxy (Figure 17 and Figure 18). This contrasts with the initial period following the September 15th SEC announcement, when both ETF flows and our futures-position proxy had increased.
Beyond the SEC, the CFTC is exploring a path to bring leveraged crypto activity onshore. Most leveraged crypto trading today occurs on offshore venues that many US participants cannot access. The CFTC has floated the idea of a new market category that could enable leveraged retail trading on compliant US platforms, with customer accounts and assets generally held through registered intermediaries. This remains early stage and is best viewed as a request for feedback rather than a final proposal, and meaningful implementation is unlikely before 2027. Still, the benefit could be indirect but important. Activity that migrates onshore can deepen liquidity, improve price formation, and eventually support the development of more liquid regulated venues that institutions are more likely to use.
From a regulatory point of view, stablecoins have been the most durable segment so far. Supported by the GENIUS Act and related regulatory actions, stablecoins are increasingly being positioned as a practical tool for payments and liquidity. The OCC has granted national trust charters to a growing set of stablecoin issuers and digital asset firms, bringing activities like custody, reserve management, and issuance under federal oversight. These charters are not immune from challenge, as community banks, through the ICBA, have sued the OCC over aspects of the approvals. Even so, once granted, charters tend to be difficult to unwind in practice.
Finally, the FASB is considering accounting treatment that would allow corporate treasuries to classify certain qualifying stablecoins as cash equivalents on the balance sheet. The proposal is open for comment until November 19. Adoption would support broader use beyond crypto trading, toward payments and liquidity management for corporates and institutions.
In all, while various US regulatory bodies enact rules to encourage institutional participation in the crypto ecosystem, somewhat offsetting the negative from the failure of the Congress to pass the Clarity Act, elevated political and legal risk premia are likely to persist until comprehensive market-structure legislation is eventually passed. For now, the crypto industry has to rely on a patchwork of regulatory actions that could be overturned in as soon as two years, if a Democrat wins the White House.
Appendix
ETF Flow Monitor (as of 21st October)
Short Interest Monitor
Spec position monitor
Mutual fund and hedge fund betas
CTAs – Trend following investors’ momentum indicators
Corporate Activity
Pension fund and insurance company flows
Credit Creation
Bitcoin monitor
Japanese flows and positions
Commodity flows and positions
Corporate FX hedging proxies
Non-Bank investors’ implied allocations
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Completed 21 Oct 2026 07:05 PM BST Disseminated 21 Oct 2026 07:05 PM BST