Long/Short Hedge Funds Favor Large Caps & Nasdaq 100 ~ market folly

Wednesday, February 2, 2011

Long/Short Hedge Funds Favor Large Caps & Nasdaq 100

Bank of America Merrill Lynch is out with its latest Hedge Fund Monitor report and they estimate that long/short equity funds are now 35% net long. This is an increase in equity exposure because over the past few weeks, hedge funds had reduced equity exposure. Additionally, their exposure is primarily focused on large caps and we've highlighted countless times that numerous high quality large caps are undervalued.

Recent hedge fund moves across various asset classes include reduced long positions in soybean and corn, but increased stakes in wheat longs. In forex, managers were buying the Euro, selling the dollar, and buying the Japanese Yen (now a crowded long). This is intriguing because last week we saw a hedge fund shorting the Yen.

In metals, hedgies sold gold and copper but continued to hold silver and palladium. Copper is a crowded long so the selling has been counter-trend while the selling in gold has dragged on for some time now.

Here are summaries of the recent moves across fund strategies:

Long/Short Equity: Increased equity exposure as of late, back close to historical average levels of 35% net long; mainly favoring large caps across the board (both high quality and growth).

Market Neutral Funds: Maintained 4% net long exposure, taising inflation exposure and favoring small caps.

Global Macro: These hedge funds continued to buy US equities and emerging markets, the latter of which is now a crowded long position.

Embedded below is Bank of America Merrill Lynch's latest Hedge Fund Monitor Report:

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