You’ve heard it again and again: You only need downside protection if you have exposure to hedge. And if your cash allocation is elevated, that’s a de facto ATM put.

Cash is the best kind of optionality there is, which is why, historically, I’ve been reluctant to part with it, even in cases where the risk-reward asymmetry on prospective investments is very good. I often envy the younger me: Cash-rich (not necessarily “rich” in a strict sense, but rather in the sense that I had very few other assets relative to the amount of liquid cash I held) and no obligations to speak of. At any time, I could’ve found an apartment in Alaska, packed a duffle bag and disappeared forever.

Anyway, in 2022, key investor cohorts were under-positioned in assets and Overweight cash as an inhospitable Fed fought to corral inflation. That reduced the need to hedge, and created a distinctive equities vol regime. Now, as cash gets deployed into assets on expectations for the end of the hiking cycle, that regime is shifting.

“The US equities vol regime as it currently stands in Q2 2023 has moved into ‘polar opposite’ territory [compared to] where it was just a few months ago in Q4 2022 / Q1 2023,” Nomura’s Charlie McElligott said Monday. “Equities clients have been forced back into market participation, taking up net- and gross- exposure meaningfully and deploying from historically large cash positions.”

The table above gives you a sense of the shift in the vol landscape.

In the QT era (i.e., 2022) you were long the dollar versus short assets, “hence, ~0%ile rank US equities index skew and ~0%ile ‘wingy downside’ put skew vs ~100%ile rank ‘equities crash up‘ call skew,” Charlie wrote, before detailing the shift illustrated by the visual. Now that markets perceive the end of Fed tightening, it’s short the dollar and deploy sideline cash into assets, “hence ~100%ile rank US equities index skew and ‘wingy downside’ put skew versus ~0%ile call skew.”

In essence: Last year, you had no exposure, so you didn’t need left-tail protection, you needed right-tail optionality in case of melt-ups in assets you didn’t own. Now,  you’re getting long assets again, so you need left-tail hedges in case something goes wrong with those assets.