Hedge Funds Sell the S&P 500 & Commodities (Trend Monitor Report) ~ market folly

Wednesday, January 27, 2010

Hedge Funds Sell the S&P 500 & Commodities (Trend Monitor Report)

Bank of America Merrill Lynch has released the latest iteration of their hedge fund trend report and we gain some more insight as to which direction hedge funds are moving with their portfolios as of late. We continue our theme of 'wisdom Wednesday' here at Market Folly where we've been posting up insightful letters, research and resources from various sources. We've already posted up Bill Gates' 2010 annual letter, as well as Bill Gross' February investment outlook out of PIMCO. Next, let's get back to our main focus: hedge funds.

In their hedge fund monitor report, BofA analyzes the week-by-week movements of hedge funds as a whole, and here's what they're seeing. In equities, hedge funds were very long the Nasdaq (NDX) and have been selling the S&P 500 (SPX). In commodities, they were very long gold and crude oil (but reducing their position sizes), while still being very short natural gas. They also continue to buy copper. In currencies, they were long the US dollar and short the Euro. This is very much in line with what we saw last time we looked at hedge fund positions & exposure.

In terms of treasuries, hedge funds were long the 2 year treasury and short both the 10 year and 30 year treasuries. Specifically, they have reduced their short exposure in the 10 year and have increased their short exposure in the 30 year. They also slightly decreased their long in the 2 year. Overall, this trade is still in line with the curve steepeners we've been talking about for months now. Hedge funds (and even hedge fund legends) have been betting on higher interest rates and inflation. Just yesterday, we posted up about how Howard Marks of Oaktree Capital had outlined plays for inflation. Here's a few more examples: 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).

Turning now to hedge fund exposure levels, we see that long/short equity funds have "continued to pare their market exposure to ~30-32% net long last week, dipping further below the historical average range (35-40%). At the same time, Market Neutral funds' equity exposure continued to rise after spiking up sharply last week to the highest levels since June. Macro HF's modestly net long US equity exposure remained largely unchanged last week while at the same time they bought the Emerging Markets but continued to sell the EAFE region."

Since we like to mainly focus on long/short equity funds as they're the easiest to track, we wanted to also provide some more color on their positioning. Specifically, they are favoring large cap stocks and 'high quality' names. When we last covered l/s equity positions, we saw that they were favoring value stocks. This play has been somewhat neutralized now. Still though, they definitely shifted away from growth plays in early January. While they also have positive inflationary expectations, these expectations are slightly lower than previous readings. As we've detailed with Bill Ackman's latest play, hedge funds are definitely favoring high quality companies with lots of international exposure as a means to deter inflation.

Embedded below, you will find the entire Bank of America Merrill Lynch hedge fund monitor report. RSS & Email readers, you'll need to come to the site to view it:

That wraps up our coverage of hedge fund exposure levels for now. For more research as to what the smart money is investing in, check out the top 10 stocks held by hedge funds, as well as 10 investment themes for 2010.

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