Rattled Wall Street on alert after trillion-dollar risk runup

Core Viewpoint - Wall Street is experiencing renewed anxiety over credit risks following significant market events, including the collapse of First Brands Group and Tricolor Holdings, which have raised concerns about hidden credit losses and broader lending stress [1][3]. Market Sentiment and Positioning - Investors had previously been optimistic, largely ignoring risks such as government shutdowns and high valuations, with allocations to risky assets reaching 67% of tracked portfolios by the end of August [2]. - Despite a bull market adding $28 trillion in value, recent volatility indicates a shift in sentiment, with over $3 billion exiting high-yield bond funds in a week [3][8]. Credit Risk and Investment Strategies - Strategies that mitigate credit risk are gaining popularity, with a focus on shorting higher-leveraged firms while supporting low-debt counterparts [4]. - The tone among large money managers is shifting towards discipline, with concerns about lax credit standards and speculative flows disconnected from fundamentals [5]. Risk Reduction Actions - Legal & General, managing $1.5 trillion, has reduced risk exposure due to a mismatch between investor positioning and fundamentals, moving to short equities [6]. - Berenberg's head of multi-asset strategy has trimmed equity exposure by approximately 10 percentage points and added equity hedges, indicating a cautious approach [7]. Market Performance and Indicators - The S&P 500 rose by 1.7% despite credit concerns, while the S&P Regional Banks Select Industry Index fell nearly 2% [8]. - High-yield corporate bond spreads widened by 0.25 percentage points to 2.92 percentage points this month, and the VVIX reached its highest level since April, indicating increased investor anxiety [8]. Active Management Challenges - The proportion of long-only actively managed funds beating benchmarks is at a low of 22% for 2025, intensifying the pressure on managers to chase performance despite deteriorating fundamentals [9]. Crypto Market Dynamics - The crypto market has not rebounded after a $150 billion loss, with a notable absence of retail buying interest, suggesting a shift towards risk control rather than speculative behavior [10].