Hedge Funds Favor Growth & High Quality Stocks: Trend Monitor Report ~ market folly

Wednesday, March 10, 2010

Hedge Funds Favor Growth & High Quality Stocks: Trend Monitor Report

Bank of America Merrill Lynch is out with their weekly summary of hedge fund exposure levels so we thought we'd take a look. They note that hedge funds in general were buying the Nasdaq and oil. Also, we see that some hedge funds began to cover short positions in the Euro. There has been a big deal made lately about hedge funds "ganging up" on the euro. So, it appears that some funds have covered now after the currency had been heavily shorted over a two-week period.

Let's now take a look at their findings regarding market exposure levels. In the past, we had pointed out how long/short equity hedge funds had reduced their exposure to below historical levels. There was a multi-week period where hedge funds were largely de-risking and it appears that trend has reversed. They have slowly started adding back exposure and are around the 34-35% net long level (approaching the historical average of 35-40%).

BofA also outlined how hedge funds are proceeding in their specific strategies. Turning to market neutral funds, they find that these funds are favoring growth names and still have positive inflationary expectations. While their market exposure has fallen, it still remains above the average levels. Long/short equity hedge funds, on the other hand, continue to increase market exposure and have growth & high quality tilts. This is largely what we've seen out of hedgies lately as they see more compelling opportunities in 'high quality' stocks. In fact, the vast majority of the most important stocks for hedge funds fit this description.

Embedded below is Bank of America Merrill Lynch's hedge fund trend monitor report in its entirety:

You can directly download a .pdf here.

In the end, this data largely draws the same conclusions we've seen in recent weeks: hedgies love growth names and are partial to high quality stocks. We've seen this exact sentiment long echoed in our hedge fund portfolio tracking series. Some of the most prominent managers have sizable stakes in strong bluechip type companies like Microsoft (MSFT), Pfizer (PFE), Wells Fargo (WFC), etc. And, on the growth front, many funds favor stocks like Apple (AAPL), DirecTV (DTV), Mastercard (MA), & Monsanto (MON). These findings fall largely in line with the stocks listed on Goldman Sachs' VIP list as well.

For more research from BofA, we've previously posted up their research from the beginning of the year as they recommended to overweight equities and underweight bonds.

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