Long/Short Equity Hedge Funds Shift From Growth To Value Stocks ~ market folly

Tuesday, January 12, 2010

Long/Short Equity Hedge Funds Shift From Growth To Value Stocks

As per Bank of America Merrill Lynch's latest hedge fund monitor report, we see that 2010 is off to a flying start. Hedge funds have started the year strong performance wise and were out buying equities and commodities. This comes after hedge funds returned over 17% in 2009, a polar opposite of their return in 2008. Back in December 2009 we noted that hedge funds were very long equities and that trend has continued as trades taken so far this year include extending their net long position in equities, moving further into crowded longs in crude oil and the US dollar, as well as continuing to hold yield curve steepeners. While PIMCO's Bill Gross has offered up an explanation for why the stock market was up 70+% last year, we know that all the buying by hedge funds certainly didn't hurt either.

Hedge Fund Long & Short Positions

Taking a look at the largest long positions, we see that the hedge fund universe as a whole are very long the Nasdaq (NDX), gold, crude oil, heating oil, and the US dollar. Shifting to their short positions, they are bearish on natural gas, the euro, as well as 10 & 30 year treasuries. The bearish sentiment on treasuries and their wager against them via yield curve steepeners is by no means new. We've covered this trade extensively for quite some time. 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). We could go on, but the point is that many prominent hedge funds have been in this play for a while now.

Let's now shift to specific hedge fund strategies. We typically like to focus on stockpicking hedge funds here at Market Folly since they're the easiest to track. However, below we'll cover exposure levels of market neutral funds, long/short hedge funds, as well as global macro hedge funds.

Market Neutral

Hedge funds employing a market neutral strategy have kept market exposure flat (appropriately). They have been tilting towards growth names and high quality stocks. As it pertains to inflation, they have neutral expectations. Overall, market neutral funds are neutral equities and have been moving toward higher quality names.


Hedge funds in the long/short domain have brought their exposure levels back up to 'average' levels as they are now around 36-37% net long. Contrary to their market neutral fund colleagues, long/short funds as a whole have recently favored value stocks, buying both large caps and 'low quality' names. As it pertains to inflation, they have positive inflationary expectations. The main takeaway here is that l/s funds have shifted from growth names to value names.

Global Macro

Global macro hedge funds often move in and out of positions much more frequently so keep that in mind. To start the year, these funds were buying the S&P 500 (SPX/SPY) and selling the Nasdaq (NDX). They held their net long positions in commodities but have continued to cover shorts in the US dollar. These funds also aggressively sold emerging markets as they reduced their stake in this crowded long. Again touching on the treasuries trade, we see that global macro funds were adding to their shorts in the 10 year treasury last week. The chart below again emphasizes the various hedge fund positions in treasuries:

(click to enlarge)

This trade has become awfully drawn out and could be due for a breather. For those of you still interested in learning how to replicate this play though, head to this post on curve steepeners.

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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