Hedge Fund Exposure Levels: Still Very Long Equities ~ market folly

Thursday, December 10, 2009

Hedge Fund Exposure Levels: Still Very Long Equities

Bank of America Merrill Lynch is out with some recent data on hedge fund portfolio positioning as of the first week of December. Per their hedge fund monitor report, we see that hedge funds were still very much long equities as they have overweighted that asset class as well as energy and precious metals. We also learn that they were covering shorts in 10-Year Treasuries and the US dollar index. Those two short positions have been widespread in hedge fund land for some time now as hedgies bet on inflation via rising rates and a weak dollar. While in the past we've covered specifics like what ten stocks are most popular amongst hedge funds, we're taking a step back today to highlight the broader picture.

Overall Exposure Levels

Long/Short Equity Hedge Funds: While most L/S funds typically have had 30-40% net long exposure historically, December kicked off with hedge funds net long by around ~45%. This comes after long/short funds had hit a multi-year high level of 50% net long in mid November. Some recent action by these funds suggest that their inflationary expectations are declining and they have been shifting from value and high quality names into small cap names.

(click to enlarge)

Market Neutral Hedge Funds: They note that market neutral funds have stuck to their name and have gone back to 'neutral,' having spiked in weeks prior. Overall, they are largely neutral on equities and have negative inflationary expectations.

Global Macro Hedge Funds: Additionally, global macro hedge funds have been in a 'crowded long' of the S&P 500 and have also been in an even more crowded long of emerging markets. Bank of America Merrill Lynch's readings on net long emerging market positions are at the highest they have been since August 2008. They also apparently have been selling 10-Year Treasuries and have been modestly covering shorts on the US dollar (a crowded trade).


We also now want to turn to commodity exposure levels as they have taken center stage again with Gold's parabolic rise.

Gold: Their research indicates that in the first week of December, large speculators were selling gold. However, this is still very much a crowded trade to the longside. They note that gold completed what they call a 'head and shoulders continuation pattern that projects up to $1300-1350.' So, interesting to see their price targets on the precious metal as those levels fall largely in line with technical analysis price targets on gold that we've seen. Also, we've recently covered the latest offering from hedge fund icon John Paulson. Those interested in gold should read his rationale in our in-depth post on his new gold fund.

Silver: They are noting that large speculators were buying silver somewhat at the beginning of December and that it is stuck in a trend channel. Their target upside is in the $20 area and they see support in the $14-15 range. The long-term upside target on silver is an old high of $50.

Copper: Well, Dr. Copper was holding steady as large speculators pretty much left their net long position unchanged. They note that copper has an upside potential to $350 while they are identifying support in two areas: $290 as well as $260.

Platinum: Large speculators mildly increased their bets on this metal in the first week of December. After falling off last year due to weak automotive demand, the metal has bounced back and has support at $1250 and resistance at $1500 according to Bank of America Merrill Lynch's research.

Crude Oil: In this commodity, large speculators held their steady net long positions as of the first week of December, having been selling at the end of November. They note that crude has been trading in a sideways range of around $65-75 since July and a breakout above this area would obviously prove to be bullish. They end their note saying that the "crowded long position remains a contrarian negative." We also recently highlighted a technical analysis video on crude oil that identified a potential pattern in this commodity as well.

Natural Gas: This commodity has been on a deathspiral for some time and it looks set to continue. As of the first week in December, large speculators were holding their deep net short position. Bank of America Merrill Lynch has commented on current action, saying it "appears to be in a broad base-building process."

Fixed Income

Moving lastly to fixed income, we thought it would be prudent to check in on hedge fund positioning as it relates to US Treasuries. As we've detailed on Market Folly before, there have been tons of prominent hedge fund managers involved on the short side of this trade. Many prominent hedge funds and market gurus have previously warned of inflation and have shorted long-term US treasuries. One of the original hedgies Michael Steinhardt himself has called treasuries foolish. Legendary investor and ex-Quantum fund manager Jim Rogers shares this sentiment and dislikes treasuries. Hedge fund legend Julian Robertson is betting on higher interest rates and is doing so via constant maturity swaps (CMS).

There are also managers playing the other side of the trade as bond vigilante Bill Gross of PIMCO is betting on deflation and has been buying treasuries. What's interesting here is that technically, both sides of the trade can win. One side of the trade could profit from short-term ebbs and flows, while the other side of the trade could win out in the long-run. It will arguably take years for the final verdict to play out, but that doesn't mean money can't be made in the mean time.
Here is the latest hedge fund positioning on 30-Year Treasuries, 10-Year Treasuries, as well as 2-Year Treasuries:

(click to enlarge)

That wraps up Bank of America Merrill Lynch's coverage of hedge fund exposure levels as of the first week of December. While it's good to see overall hedge fund exposure levels, those of you wanting more specific positions can head to our post on the top ten stocks owned by hedge funds. It's interesting to see how hedge funds are positioned heading into the close of the year and we're sure they'll be adjusting once the new year starts as well. To see how hedge funds might position themselves for next year, check out ten investment themes for 2010.

blog comments powered by Disqus