Long/Short Equity Hedge Funds Favoring Small Caps: Trend Report ~ market folly

Tuesday, April 13, 2010

Long/Short Equity Hedge Funds Favoring Small Caps: Trend Report

We're back with the latest Bank of America Merrill Lynch hedge fund monitor report. This time around, we see that hedge funds have sold the Japanese yen down to the lowest levels since mid 2007. This comes after last week where we saw hedgies were starting to aggressively sell the Japanese yen. And just yesterday, we examined some Societe Generale research that found hedge funds were net short 10 year treasuries. Digging into the highlights of BofA's latest findings, we see that equity focused hedge funds have been favoring small cap stocks as the high beta rally marches on.

In equities there is a bit of a divergence between various hedge fund strategies. Market neutral funds have been bringing their market exposure above average (net long). Conversely, we see that long/short equity funds only have 30% net long exposure, well below their historical range of 35-40% net long. Where both of these fund strategies agree, however, is small cap names as both favor those types of stocks.

Based on CFTC data, large specs added to their shorts in S&P futures. Additionally, we see that hedgies were out aggressively buying gold and adding to their crowded long in copper. The crowded trade meme also continued in crude oil as many are long there. In currencies, the main takeaway is that hedgies continued to aggressively sell the yen down to the lowest levels since mid 2007. In interest rates, we see that funds are still very short the long end of the curve. They've modestly sold their 2 year treasury positions and still very much have the curve steepener trade on.

Year to date, event-driven and convertible arbitrage are the best performing fund strategies as a whole. This definitely confirms what we've seen from some first quarter hedge fund performance numbers. Dan Loeb's hedge fund Third Point (which often has event driven investments) leads the pack as one of the top performers this year so far.

Embedded below is Bank of America Merrill Lynch's latest hedge fund trend report:

You can download the .pdf here.

For more of our coverage of hedge fund trends and exposure levels, head to our posts on how hedge funds are net short ten year treasuries and have been selling the yen. If you want updates as to the specific stocks managers are investing in, head to our hedge fund portfolio tracking series.

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