Latest Hedge Fund Exposure Levels: Trend Monitor Report ~ market folly

Wednesday, June 30, 2010

Latest Hedge Fund Exposure Levels: Trend Monitor Report

We've been tracking hedge fund exposure levels across asset classes for some time now. During this chronicle, we've seen hedge funds short the euro and then last week we saw them start to cover those shorts. One recent move that has been spot on has been global macro hedge funds going net short equities. So, given the recent market decline, how are hedge funds positioned now?

Bank of America Merrill Lynch is out with their latest hedge fund monitor report where they opine that hedge fund returns for the second quarter of 2010 are very likely to be negative. This shouldn't necessarily come as a huge surprise given that May was a brutal month for hedgies. Month to date for June, merger arbitrage and convertible arbitrage have been the best performers. Surprisingly, global macro has been the worst performing strategy. So even though they have been net short equities, it seems their books have been hurt elsewhere.

In terms of the latest market exposure, long/short equity funds are now on average 30% net long. This has slowly started to creep up in recent weeks as they begin to increase market exposure. In terms of specifics, it appears as though l/s funds now very much favor large cap stocks. Additionally, they continue to sell emerging markets after having higher than average exposure in this arena as of late. This comes after these hedgies have had low net long exposure through 2010. Market neutral funds, on the other hand, continued to reduce market exposure. These two strategies have seemed to move conversely of each other over the past month or so with regard to equities.

Turning to global macro hedge funds, Bank of America estimates that these funds have held their equity short position steady but have added to their net short in commodities and 10 year treasuries. Given the flattening that has occurred in regards to treasury yields as of late, it's interesting to see hedgies press toward a crowded short in 10 year treasuries yet again. This seems to be a trade they just refuse to let up on. Late in 2009, we detailed how global macro guru Paul Tudor Jones' hedge fund Tudor Investment Corp favored curve flatteners as tail risk insurance. We'd be very interested as to whether or not they still hold this viewpoint.

Embedded below is the latest hedge fund monitor report from Bank of America Merrill Lynch:



You can download a .pdf copy here.

So despite market volatility and poor performance, it seems that long/short equity hedge funds have been increasing market exposure. As more market prognosticators seem to forecast a negative future for equities, we'll watch closely to see what the 'smart money' is doing. Maybe the most prudent thing to note through all of this is that hedge funds reduced equity exposure long before the market pullback this year. Yet, despite this accurate timing, hedge funds as a whole are still are generating poor performance numbers thus far in 2010.

For the latest specific investment manager moves, head to our daily hedge fund portfolio updates.


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