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:



Email readers will need to come to the site to view the document.

Hedge Funds Reduce Equity Exposure to 25% Net Long

It's been a while since we last checked in on the latest hedge fund exposure levels so today we present Bank of America Merrill Lynch's Hedge Fund Monitor. To start the new year, they estimate that long/short equity hedge funds have further reduced exposure to now just 25% net long. Historically, average equity exposure has been 35-40% net long equities.

The last time we saw hedge funds reduce risk assets in late October, the market fell around 3.6% about a week later. Maybe it was a bit of luck with market timing, but it seems as though hedge funds in general have been ahead of the curve with their recent maneuvers.

After the market's furious rally over the past few months, it's clear that some managers think the equity market is overbought in the short-term and expect a pullback. However, many strategists like Jeff Saut believe dips should be bought.

Looking through current hedge fund trades across asset classes, there are a few notable plays that stick out. First, hedgies continue to hold crowded long positions in soybeans and corn. Crude oil and Copper are also crowded net long plays in the commodities spectrum. And turning to forex, we see that hedge funds have pressed their shorts against the Euro. Last, in interest rate plays, managers hold a crowded net short in the 10-Year notes.

Long/Short Equity

As mentioned above, the l/s equity strategy has seen a sizable reduction in net long exposure as funds lock-in gains. These hedge funds still favor large cap names (with a preference of growth over value).

Market Neutral

Interestingly enough, market neutral funds not have around 5% net short exposure. This comes after they spent the majority of 2010 with net positive market exposure. These funds have shifted from growth plays to value.

Embedded Below is Bank of America Merrill Lynch's Hedge Fund Monitor:



You can download a .pdf copy here.

So it seems that hedge funds continue to favor commodities here as inflationary plays. A month ago, we detailed that Dan Arbess' Xerion Fund preferred commodities. John Burbank's Passport Capital also favors hard assets.

It's clear hedge funds are protecting some of their gains from the equity rally as exposure has been reduced further. Hedgies reduced risk assets right before the last market decline, so we'll have to see if they've sent another warning sign with their latest reduced exposure.

Hedge Funds Reduce Risk Assets

Bank of America Merrill Lynch is out with their latest hedge fund monitor report examining various exposure levels. In it we see that overall, hedge funds were reducing risk assets. Across the board, it seems that hedge funds bought 2 year, 10 year and 30 year Treasuries signaling a flight to safety. This is intriguing considering that equity markets have not seen a massive decline since August, the last time we saw a risk-off trade. Are they exiting before a proverbial near-term top?

Long/Short Equity Hedge Funds

Combine the above with the fact that these hedge funds have largely reduced market exposure and now have a very low 21% net long exposure and you can see the caution. On average, L/S hedge funds are typically around 40% net long. It certainly seems as though many funds are braced for a pullback, at least in the short term. Of the equities they do own, they favor growth, large cap and high quality names. This is a trend in hedge fund positioning that we've highlighted for some time now.

Global Macro

It appears as though this fund strategy is largely pursuing inflation based plays. BofA estimates that macro hedge funds are long the S&P 500, Nasdaq 100 and various commodities. On the short side of things, they've been pounding the US dollar. John Burbank of hedge fund Passport Capital at the Value Investing Congress noted that he currently likes commodities & hard assets.

Market Neutral

Turning to MN funds, we see that their exposure has been pretty much stable at around 50/50 long short. In equities, they've favored small cap, growth & low quality names.


Across various markets, there are a few notable crowded longs including crude oil, the Nasdaq 100, corn, soybeans, copper, and the Japanese yen. Conversely, natural gas remains a crowded short position. Embedded below is Bank of America Merrill Lynch's full hedge fund monitor report:



You can download a .pdf copy here.

We also recently took another look at hedge fund exposure levels for those of you seeking more information on the latest positioning of the 'big money.'

Investors Favor 'Mega' Hedge Funds: Performance & Exposure Level Update

Bank of America Merrill Lynch's second quarter hedge fund report has come up with some interesting conclusions based on recent activity. While hedge funds had a brutal May and June performance wise, July was a little bit more friendly. Year to date, distressed credit is the best performing strategy, gaining 3.56% with convertible arbitrage coming in second, up 2.41%. While hedge fund performance was slightly down in the first quarter, the second quarter was much worse as hedgies finished Q2 down 2.5%.

In terms of asset flows for the second quarter, hedge funds saw $9.5 billion in net inflows, and interestingly enough $7.9 billion of that flowed into relative value strategies. Additionally, the fact that the majority of capital went to 'mega' hedge funds should come as no surprise as investors love the big names. Over 92% of capital inflows went into funds with greater than $5 billion in assets under management. According to HFR Industry Reports, these mega funds now manage around 60% of the capital in the industry.

Turning to recent exposure levels, long/short funds have well below historical exposure as they are now only 21% net long equities. It has been this way practically all of 2010 as they continue to reduce exposure. Two weeks ago, these funds were 30% net long and historically, funds have been net long 35-40%. Earlier this morning we saw that Dan Loeb's hedge fund was only slightly out of this range at almost 32% net long.

Bank of America Merrill Lynch's hedge fund monitor report recently detailed the fact that long/short equity hedge funds reduced market exposure while market neutral funds increased exposure. These two fund strategies have been dancing conversely of one another in equities as market neutral tend to do the exact opposite of l/s funds. This is a theme we've seen play out over the past few months.

Regarding other recent notable asset class moves, BofA highlights that numerous large speculators sold positions in gold and silver. That much was obviously evident given the big moves we saw in those markets over the past few weeks. In crude oil, funds were definitely buying and that has continued into this week. For a closer look at how 'black gold' is trading, head to some technical analysis of crude oil.

In currencies, hedgies covered their shorts in the euro and held their long position in the US dollar. Turning to interest rates, many hedge funds added to their shorts of the 30 year treasuries and 10 year treasuries. Embedded below is Bank of America Merrill Lynch's hedge fund monitor report:



You can download a .pdf copy here.

To follow specific investment manager activity, we point you toward our hedge fund portfolio tracking series. Additionally, we've covered numerous hedge fund letters worth reading as well.

Latest Hedge Fund Positioning: Exposure Monitor Report

Bank of America Merrill Lynch is out with the latest rendition of their hedge fund monitor report. Last week we took note that hedge funds had increased short exposure yet were still suffering poor performance. The May performance numbers for many hedge funds were terrible, and June wasn't a ton better for many. In June, distressed credit funds were down 1.66% and long/short equity funds lost 1.09%. So, how have hedge funds positioned themselves lately after such poor performance?

Long/short equity hedge funds continue to have low net long equity exposure at around 27% net long. This continues to be well below the historical average of 35-40%. L/S funds still slightly favor growth stocks over value at the moment. And while these hedge funds have favored high quality stocks for quite some time, this exposure is volatile and some funds have reduced exposure in this regard recently. Market neutral funds, while as of late they've taken opposite positions of L/S funds, are now flat in terms of equity exposure. Global macro hedge funds on the other hand have reduced emerging markets exposure and covered their short position on US indices. You'll recall previously that we highlighted how global macro funds were net short equities and they certainly banked on that trade.

Based on CFTC data, however, other hedge funds (large speculators) have added to their short positions in both the S&P and Russell 2000. Bank of America Merrill Lynch highlights two recent hedge fund portfolio moves of note. Firstly, they point out that hedgies are now in a crowded long in the Japanese Yen. Secondly, they highlight the net short position in Nasdaq futures that many speculators have put on.

To see the latest hedge fund exposure levels, view the full monitor report from BofA embedded below:



You can download a .pdf copy here.

You can also view previous exposure reports where we saw hedgies increasing short exposure. So while hedge funds clearly are having a hard time with this tape, market strategist Jeff Saut says that the answer is in risk adjusted stock selection and risk management, two solutions he lists as keys to portfolio success in 2010. We'll continue to monitor the latest hedge fund exposure levels to see who is able to generate some alpha out there.

Hedge Funds Increase Short Exposure Yet Still Suffer Poor Performance

You might be surprised by the fact that hedge fund returns in the second quarter of 2010 might be the worst since late 2008, according to Bank of America Merrill Lynch. Obviously this is largely due to the ramp up in volatility and subsequent decline in equity markets that took place in May and June. May was a brutal month for hedgies and now as June performance numbers trickle in, we're seeing big players suffer. For instance, John Paulson's Recovery Fund was down 12% and his Advantage Plus Fund lost 6.9%. And despite Lee Ainslie of Maverick Capital's notion that 2010 would be a stockpicker's market, many long/short funds have been hammered.

Last week we examined the latest exposure levels of many funds and saw that they had historically low net long exposure in equities. Despite this, they continue to pump out poor performance numbers. Let's take a look at things to see if we can get a better idea as to where they've gone wrong.

Given the recent market decline, it's almost as if hedge funds have been reactive rather than proactive. Many of them clearly expected a pullback as they had been reducing net long equity exposure since the beginning of the year. Yet while they reduced risk/exposure levels, they weren't proactively building their short book as much as they maybe should have... until now, seemingly after the majority of the recent decline. Bank of America notes that the "aggregate adjusted short interest (ASI) for the S&P 1500 increased 6% from its lowest levels in more than three years. This is the largest one-time increase since early March 2009."

This notion implies that there is much more room for hedgies to increase short positions. At the same token, large increases in short interest has also served as a contrarian buying opportunity on many occasions. On a sector basis, the largest increase in short interest has recently been in Financials, Utilities, and Health Care.

Bank of America also updates us on the performance of their hedge fund generals index. This strategy that compiles a basket of the most favorite stocks among hedge funds is down 6% year to date versus the S&P which is down 7.6%. In 2009, the hedge fund generals index outperformed the S&P by a whopping 46%. Those of you with Bloomberg terminal access can pull this up using MLDIHGFN. We've also covered the stocks listed on the hedge fund generals index here.

So while the hedge fund consensus picks have lost money this year, they are still outperforming the general market indices. Some funds are even bucking the trend entirely, such as Dan Loeb's Third Point who is up over 10% year to date. Those of you looking for what the consensus hedge fund picks are these days would also be interested in Goldman Sachs VIP list.

Lastly, let's focus on where hedge funds have been positioned as of late. As the second quarter came to a close, hedgies were largely net long gold, short the S&P 500 and Russell 2000. Additionally, many have been long the US dollar and short the euro. The most recent data suggests that hedge funds are 27% net long equities, down from last time's 30% exposure and well below the historical average of 35-40%.

In treasuries, hedgies continue to add to crowded short positions in the 10 year and 30 year. Additionally, they partially sold their net longs in the 2 year. Many funds held their positions in various precious metals steady and some sold crude oil. Embedded below is the latest hedge fund monitor report from Bank of America Merrill Lynch:



You can download a .pdf copy here.

So despite reducing exposure levels, hedge funds still seem to have taken it on the chin in May and June. Many funds have re-actively boosted short exposure in hopes to stem further loses. What's interesting is such a maneuver in the past has marked a contrarian buying opportunity (at least in equities). And, that's exactly what seems to have happened recently as markets have rapidly bounced. This almost makes you wonder if hedgies will put in poor performance numbers again if this keeps up. We'll have to see how they position themselves ahead for the rest of the year and if they engage in further knee-jerk reactions. Head here for more recent broad hedge fund exposure levels and here for Dan Loeb's hedge fund specific exposure which was updated this morning.

Latest Hedge Fund Exposure Levels: Trend Monitor Report

We've been tracking hedge fund exposure levels across asset classes for some time now. During this chronicle, we've seen hedge funds short the euro and then last week we saw them start to cover those shorts. One recent move that has been spot on has been global macro hedge funds going net short equities. So, given the recent market decline, how are hedge funds positioned now?

Bank of America Merrill Lynch is out with their latest hedge fund monitor report where they opine that hedge fund returns for the second quarter of 2010 are very likely to be negative. This shouldn't necessarily come as a huge surprise given that May was a brutal month for hedgies. Month to date for June, merger arbitrage and convertible arbitrage have been the best performers. Surprisingly, global macro has been the worst performing strategy. So even though they have been net short equities, it seems their books have been hurt elsewhere.

In terms of the latest market exposure, long/short equity funds are now on average 30% net long. This has slowly started to creep up in recent weeks as they begin to increase market exposure. In terms of specifics, it appears as though l/s funds now very much favor large cap stocks. Additionally, they continue to sell emerging markets after having higher than average exposure in this arena as of late. This comes after these hedgies have had low net long exposure through 2010. Market neutral funds, on the other hand, continued to reduce market exposure. These two strategies have seemed to move conversely of each other over the past month or so with regard to equities.

Turning to global macro hedge funds, Bank of America estimates that these funds have held their equity short position steady but have added to their net short in commodities and 10 year treasuries. Given the flattening that has occurred in regards to treasury yields as of late, it's interesting to see hedgies press toward a crowded short in 10 year treasuries yet again. This seems to be a trade they just refuse to let up on. Late in 2009, we detailed how global macro guru Paul Tudor Jones' hedge fund Tudor Investment Corp favored curve flatteners as tail risk insurance. We'd be very interested as to whether or not they still hold this viewpoint.

Embedded below is the latest hedge fund monitor report from Bank of America Merrill Lynch:



You can download a .pdf copy here.

So despite market volatility and poor performance, it seems that long/short equity hedge funds have been increasing market exposure. As more market prognosticators seem to forecast a negative future for equities, we'll watch closely to see what the 'smart money' is doing. Maybe the most prudent thing to note through all of this is that hedge funds reduced equity exposure long before the market pullback this year. Yet, despite this accurate timing, hedge funds as a whole are still are generating poor performance numbers thus far in 2010.

For the latest specific investment manager moves, head to our daily hedge fund portfolio updates.

Hedge Funds Aggressively Cover Euro Short Positions

Bank of America Merrill Lynch has released their weekly hedge fund monitor that updates the latest exposure levels from hedgies. Last time around, we saw that global macro hedge funds were short equities. This time, we see that they've been aggressively covering the euro. Obviously due to the European turmoil in recent months, hedgies have been very short the euro. Thus, this interruption in trend is worth pointing out.

Hedgies have been short the euro in size and so volatility will most likely continue in the forex market. To put this euro position in perspective, hedge funds were short -$13.4 billion notional as of two weeks ago. Last week, this position decreased to -$7.7 billion notional. The euro has essentially been in a 'crowded short zone' for much of 2010 so there is always that pressure of a sudden short squeeze. Bank of America thinks such a squeeze at best would take the Euro up to 1.30 but they don't see that happening anytime soon.

Shifting to equities, one trend worth highlighting is the fact that many hedgies continue to sell the Russell 2000 futures. In energy, it appears as though hedge funds were buying crude oil. Additionally, they remain long metals.

Long/short equity is one of the best performing strategies this month, up 0.33%. This is in stark comparison to last month where May was a brutal month for many prominent long/short operators. Position wise, we see that this strategy overall has increased its market exposure. Don't put too much weight on that though, as they are only 25% long, way below the typical range of 35-40% net long. Long/short funds also reduced emerging market exposure last week.

Shifting to market neutral funds, we see that recently they've reduced market exposure. Over the past few months it seems as though m/n funds and l/s funds have moved completely converse of each other with regard to equities. When l/s funds go long, market neutral funds seem to sell and vice versa.

Global macro hedge funds have been adding to shorts in commodities as well as in 10 year treasuries. Additionally, they've been adding to longs in the US dollar. This trade has become an opposite reflection of the one many funds put on during the crisis. (Back then, they were long commodities and short the dollar). As we detailed last week, global macro players have been net short equities in recent weeks and we see that they've continued to hold these positions.

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



You can download a .pdf copy here.

For more on the topic of position movements, head to our examination of the hedge fund herd mentality as well as our continuous portfolio tracking series.

Global Macro Hedge Funds Net Short Equities

Bank of America Merrill Lynch is out with their latest hedge fund monitor report and so we'll check in on the most recent exposure levels from hedgies. Overall, managers continued to sell equities and added to shorts in 10 year treasuries. A few weeks ago, we highlighted that hedgies had very low net long exposure and this trend continues. Also, we pointed out that long/short equity was the worst performing strategy. This trend also continues as equity funds continue to feel the sting. You can see how badly some of the top dogs fared in our May hedge fund performances update (it's not pretty).

Based on CFTC data, it is estimated that global macro hedge funds are actually net short US equities as of last week. This isn't the first time we've seen this stance as of late because back in early May, it appeared that global macro funds were net short equities then as well. Additionally, these funds are in crowded longs of the US dollar and are short commodities as well. This trade seems to be the complete opposite of what many put on during the financial crisis (short dollar, long commodities). It looks as if macro funds are pressing their bets and playing catch up. After all, we previously highlighted how these funds were struggling earlier in the year.

As of last week, long/short equity hedge funds were 22% net long. Again, this is well below historical averages of around 35-40%. These fund managers continue to favor high quality and growth stocks and we've highlighted this trend numerous times on the site before. However, last week they were slightly reducing high quality exposure.

Market neutral funds also reduced exposure to the stock market. However, they are still net long and have above average exposure. They seem to prefer value and small cap names.

Embedded below is the latest hedge fund trend monitor from Bank of America Merrill Lynch:



You can download a .pdf copy here.

For more research on what hedge funds are up to position wise, head to Goldman Sachs' VIP list and stay up to date daily with our hedge fund portfolio tracking series.

Hedge Funds Reduce Risk: Very Low Net Long Equities Exposure

Given the recent market downturn and ramp up in volatility, it should come as no surprise that hedge funds have been unwinding risk as of late. Bank of America Merrill Lynch's newest hedge fund monitor report gives us a look at their exposure levels and we see that long/short equity funds have very low net long exposure. However, they have been boosting exposure to inflation plays, growth, and emerging markets. Based on CFTC data, l/s funds reduced gross exposure by selling long positions but also by covering shorts in the S&P 500 and Russell 2000. The majority of longs they sold came from the Nasdaq 100 which would seem to indicate that hedgies were broadly favoring technology names. This would largely coincide with what we've seen from Goldman Sachs' VIP list of stocks that matter most to hedge funds.

Long/short funds are only 18% net long, significantly below the historical average of 35-40%. They are currently favoring growth and high quality stocks, something we've already seen evidence of in our hedge fund portfolio tracking series. And as mentioned above, they've also started to move significantly into emerging markets plays over the course of the last month. Depending on the region, this could possibly tie into the fact that these funds overall have positive inflation expectations. Lastly, we see that l/s funds reduced their already low market exposure a bit more over the past week.

Market neutral funds, on the other hand, are net long equities but have reduced small cap exposure. Surprisingly enough, despite their net long position they managed to escape the month of May largely unscathed. These funds have generally favored value names and have increased that lean over the past few weeks. Market neutral funds also have negative inflation expectations and have been in many 'low quality' names.

Global macro funds bought 10 year treasuries last week and then also aggressively covered their net short US dollar positions. Bank of America Merrill Lynch also points out that these funds have been shorting emerging markets but are still net long the EAFE. This is an interesting dynamic as you have l/s funds ramping up long exposure there and conversely global macro funds increasing short exposure. Lastly, we saw that overall hedgies were covering shorts in the Japanese yen, selling crude oil, and covering crowded shorts in natural gas.

In terms of performance, the month of May was brutal for hedge funds and as a whole they lost 3% throughout the majority of the month. While that may seem tame compared to the market indices, there are definitely some outliers. We saw recently that Shumway Capital Partners' Sakkonet Fund lost around 10%, Eddie Lampert's ESL Investments was down 15%, Chris Hohn's The Children's Investment Fund lost 9% and Andreas Halvorsen's Viking Global was down 4.2%. As evidenced by some of the figures above, it should come as no surprise that long/short equity was the worst performing strategy of the month as funds were overall down 5.13% through the majority of May.

Back in early May, we discovered that global macro funds were net short equities and in the weeks prior to that we saw the smart money was selling equities. So, some funds were definitely able to head off the stampede to the exits. But as you can see from above, some of the carnage was still not pretty. Embedded below is the entire Bank of America Merrill Lynch hedge fund monitor report:



You can download a .pdf copy here.

So, while we definitely signs of funds heading for the exits before this most recent downturn, many hedgies were still blindsided. It's an interesting dynamic when you see hedge fund managers talking about how 2010 will be great for stockpicking and short selling opportunities, yet long/short equity was the worst performing strategy last month. For more on the most important stocks to hedge funds, head to Goldman Sachs VIP list. And to see some of the latest ideas from fund managers, check out the Ira Sohn Investment Conference recap as well as our daily portfolio tracking series.

Macro Hedge Funds Net Short US Equities?

Bank of America Merrill Lynch is out with their latest hedge fund monitor report which examines exposure levels across asset classes. This comes after yesterday when we examined Societe Generale's research that concluded hedge funds were very short 10 year treasuries. Turning back to BofA's publication, we saw last week that the smart money was selling equities. This remains the case as hedgies continued to reduce net long exposure. Long/short equity funds in particular are now around 25% net long, well below their historical average of 35-40% net long. Hedgies now favor high quality stocks, having previously favored low quality. Additionally, we see they are now "moving into growth relative to value."

BofA also estimates that global macro hedgies are now net short US equities and still buying emerging markets. This seems to fit hedge fund Armored Wolf's thesis that emerging market countries will 'step up to the plate' so to speak as they continue to grow and flourish while developed countries see tepid growth. This also marks the first time we've really seen macro funds net short US equities in a while. It's clear that many fund strategies are all becoming more cautious on the long side and starting to lean to the short side. Market neutral is the only strategy that remains very long equities.

In energy, hedge funds reduced some of their crowded long position in crude oil and 'modestly' covered their short position in natural gas. This is the first time we've really seen them 'let up' on this short as it has been a very deep position for many. In forex, hedgies continued to add to shorts in the euro. Turning lastly to interest rates, we see that hedge funds are still quite short the long end of the curve "but look to be favoring safety momentarily."

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



You can download a .pdf here.

For more on investment manager exposure levels, we just yesterday detailed how hedge funds are very short 10 year treasuries and you can view BofA's previous research detailing how the smart money was selling equities.

The Smart Money's Selling Equities: Hedge Funds Continue to Reduce Exposure

Bank of America Merrill Lynch is out with the latest iteration of their hedge fund monitor report and we get a glimpse at the latest exposure levels. If you like to follow the smart money, then you should highly consider selling equities because that's exactly what hedge funds are doing. Last week we posted that hedge funds had below average net long exposure and we see this trend continues. Long/short equity funds are now around 25% net long, which is definitely below their historical average of 35-40% net long. Of their long positions overall, hedgies favor small cap and low quality 'junk' stocks. Last week we also touched on how there is a divergence between l/s funds and market neutral funds. This divergence continues as market neutral funds are still net long equities (but they did reduce some beta exposure).

We also see that according to CFTC data, many hedgies have been adding to shorts in S&P futures. Whether they are simply selling longs to lock in some profit or making a market timing call, one thing is clear: hedge funds are definitely cautious in this market. We also got confirmation of this trend from David Einhorn's hedge fund Greenlight Capital. In their latest investor letter, Greenlight discloses that they were 100% long and 70% short, leaving them 30% net long for the first quarter. This is right along the lines of what we've seen across industry-wide data sets.

Turning now to other significant asset class moves from hedgies, we see that they were adding to longs in crude oil and pressing deep shorts in natural gas. Additionally, hedge funds continue to pound the euro short. In interest rates, we learn that for the third consecutive week, hedge funds have very crowded shorts in 10 and 30 year treasuries as they short the long end of the curve. Curve steepeners continue to be hedge fund land's favorite drug.

Lastly, we also get a performance update from BofA regarding their hedge fund generals list. This is a basket comprised of stocks widely owned by hedge funds. It is up 13% year-to-date for 2010 and for 2009, the HF generals index was up 69%. You can compare these figures against individual hedge funds in our first quarter performance numbers post.

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



You can download a .pdf here.

So, the trend remains much of the same across hedge fund land as of late. Hedgies are selling equities, shorting the long end of the yield curve, shorting the euro, and longing crude oil. You can view BofA's previous hedge fund trend report here and make sure to also check out their hedge fund generals list to see what stocks hedge funds love most.

Long/Short Equity Hedge Funds: Net Long Exposure Below Average

Bank of America Merrill Lynch is out with the latest edition of their hedge fund monitor report where they examine exposure levels of various hedgie strategies. In it, we see that overall market exposure is high for market neutral funds but well below average for long/short equity funds. This is a continuation of the theme we touched on last week where we saw l/s hedgies reducing equity exposure below historical levels.

Despite having opposing market exposures, both market neutral and long/short funds have performed the best thus far for April. Both strategies have favored small cap stocks and low quality names as the high beta rally carries on. Still though, hedge funds are definitely cautious on equities. Long/short funds are now well below their historical average of 35-40% net long. They currently have about 26-28% net long exposure.

Turning now to major moves across asset classes, we see that hedgies bought gold last week and also added to a crowded long in copper. In energy, hedge funds reduced their crude oil long positions (a crowded trade) and added to their deep short position in natural gas. Across the forex landscape they continued to aggressively sell the Yen, something we've noted for a few weeks now as they show no mercy for the Japanese currency. Lastly, in interest rates, hedge funds are *very* short the long end of the curve and continue to add to crowded shorts there. We just recently posted up a report about how hedgies are net short 10 year treasuries.

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



You can directly download a .pdf here.

Overall, long/short funds continue to ratchet down long exposure in the markets as they pay heed to a possible market correction. This concurs with market strategist Jeff Saut's recent thoughts as he is short-term cautious on the market as well.

Many of the same themes prevail across the hedge fund landscape as hedgies are really short the long end of the curve and still really short the Yen. To see what specific stocks these investment managers are buying and selling, head to our daily hedge fund portfolio updates.

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.

Hedge Funds Aggressively Sell Japanese Yen: Trend Report

Bank of America Merrill Lynch is out with their latest iteration of the hedge fund monitor report where they check in on trends and exposure levels. Last time around, we saw that hedge funds were buying equities & re-shorting the euro. This time, we see that hedgies have been buying oil and copper, increasing their bullish bets there. Additionally, they've been selling the Japanese Yen (aggressively) and have added to their curve steepener trades.

Based on CFTC data, here's what various hedge funds were up to in various asset classes:

Interest Rates: As mentioned above, they continued to play a steep curve by adding to their shorts in the 10 year treasury and significantly adding to shorts in the 30 year treasury, all while buying 2 year treasuries. We've covered in the past how hedge fund Prologue Capital likes curve steepeners and how you can replicate legendary fund manager Julian Robertson's constant maturity swap play.

Equities: It should come as no surprise that hedgies continued to press their crowded longs. After all, this is the market rally that just won't end. What's interesting here is the dynamic between the various markets. They continued to buy the NDX futures (Nasdaq) but marginally added to SPX shorts (S&P 500).

Energy: Crowded longs in crude oil became that much more crowded as large specs bought more. Additionally, we see that they were modestly covering natural gas shorts.

Forex: Hedge funds were recently back to pressing crowded shorts in the Euro last week. Maybe more interesting is the fact that they've sold the Japanese Yen and have gone net short. BofA notes that the appetite for risk is clearly rising as the Yen is on the verge of a technical breakdown.

Turning next to various strategy exposure levels, we thought we'd check in with what market neutral and long/short equity hedge funds have been up to. We see that market neutral funds still have above average exposure and are net long. They are losing their appetite for low quality names and are overall favoring growth and large cap plays. Long/short equity funds, on the other hand, are now well below their typical net long exposure. While they still favor value and large cap stocks, it's clear that they are taking profits and protecting from any possible impending downside risk.

Embedded below is the latest edition of Bank of America Merrill Lynch's hedge fund monitor report:



You can directly download a .pdf here.

For more BofA hedge fund research, head to their list of most concentrated stock positions: the hedge fund generals list. And as always, venture over to our hedge fund portfolio tracking for the latest movements in the most prominent long/short equity portfolios.

Hedge Funds Buy Equities, Re-Short the Euro: Trend Report

Bank of America Merrill Lynch recently released the latest iteration of their hedge fund trend report. In it, we see that hedge funds in general were adding to equity positions and selling energy stakes. In last week's hedge fund trend report, we saw that hedgies were covering the euro & buying crude oil. Probably the most notable information this time around is the fact hedge funds reversed course on the euro. BofA notes that, "they resumed shorting the Euro back to the deepest crowded levels in over a decade." So, it appears that last time's euro covering bit was purely profit taking.

Given that we track long/short equity hedge fund portfolios the most, let's check in on what they were up to. Their exposure levels dropped from 37% net long down to 30-32% net long and this is below average levels. In terms of specifics, l/s funds were reducing their growth plays relative to value (i.e. they like value stocks). In recent weeks we had seen them aggressively favor small cap names and that trend reversed course back to neutral. Overall though, they still favored high quality names.

Market Neutral funds, on the other hand, increased exposure and went net long. Bank of America estimates that global macro hedge funds also increased US equity exposure last week. Additionally, they were aggressively buying emerging markets. Embedded below is BofA's latest hedge fund trend monitor report in its entirety:



You can directly download a .pdf here.

For more hedge fund related research from BofA, we recommend checking out their list of most concentrated hedgie positions: the hedge fund generals list.

Hedge Funds Covering Euro Shorts, Buying Crude Oil: Trend Report

Bank of America Merrill Lynch is out with their latest hedge fund trend report and in it, we see the latest market positioning of various hedge fund strategies. Two weeks ago, we saw that hedgies favored high quality stocks. This past week, hedge funds sold gold and silver while buying copper and adding to their net long stake in platinum. They also added to their crowded long positions in crude oil. Additionally, we see that in forex markets hedgies continued to cover their deep shorts in the euro. Just yesterday we noted that legendary investor Jim Rogers was long the euro. In interest rates, hedge funds were covering some of their 10 year note shorts while adding to their shorts in the longer duration 30 year treasuries.

Given our site's focus on equity hedge funds, let's turn now to exposure levels there. It's no surprise to see many large specs add to their short positions in SPX futures given the large overbought condition of the markets. Additionally, we see that market neutral funds are net short equities here and have below average market exposure. Global macro funds were decreasing their net long US equities exposure while buying emerging markets. Long/short equity funds favor small cap names here, but not as much as they previously did. These hedgies still like high quality stocks and their overall market exposure sits around the historical average at 37.5% net long. However, their high quality tilt has declined recently since peaking back in February at the highest levels in over a year.

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



You can directly download a .pdf copy here.

As always, a great overview of the positioning of various hedge fund strategies. Make sure to examine the report all the way through as they examine each fund strategy in-depth separately. If you found this report resourceful, check out past hedge fund exposure levels to compare it to. For more research from BofA, we highly recommend checking out their hedge fund generals list of the most popular concentrated positions amongst hedgies.

Hedge Fund Generals Index: Most Popular Concentrated Positions

Today we present you with Bank of America Merrill Lynch's quarterly report on hedge fund holdings. In this report (released four times a year), they examine the hedge fund landscape via public disclosures to identify which stocks hedgies are really wagering on. In essence, this research is very similar to Goldman Sachs' VIP list of the securities most important to hedge funds. While our hedge fund portfolio tracking examines portfolios of specific managers, BofA has profiled the broader hedge fund universe.

We'll first start with arguably the most desirable information: their 'Hedge Fund Generals index'. This is a list of top hedge fund holdings, but with a unique twist. The HF Generals is, "an equal-weighted basket of 20 stocks that is a combination of the most concentrated and most popular stocks among HFs ... To construct the HF Generals basket we took those stocks in each quarter that ranked in the top quartile of both the most widely held stocks (popular) and those with the heaviest HF ownership (concentration), sorted by concentration."

The performance of this strategy is notable as well. For 2009, this basket of stocks massively outperformed the S&P 500 by 46%. Year-to-date for 2010, it's up 4.1% versus 0.3% for the S&P 500. BofA notes that, "this strategy has outperformed the S&P 500 index by 89bp per month/260bp per quarter between September 2003 and February 2010." Those of you with Bloomberg Terminal access can pull this up via MLDIHFGN index. Remember that the list below is equal weighted:

The Hedge Fund Generals Index

1. Take-Two Interactive (TTWO)
2. Equinix (EQIX)
3. Terra Industries (TRA)
4. Wendy's Arby's Group (WEN)
5. E*Trade Financial (ETFC)
6. Black & Decker (BDK)
7. JDA Software (JDAS)
8. Pactiv (PTV)
9. ITT Educational (ESI)
10. VeriSign (VRSN)
11. First American Corp (FAF)
12. Mead Johnson Nutrition (MJN)
13. Palm (PALM)
14. Hologic (HOLX)
15. American Eagle Outfitters (AEO)
16. Carter's (CRI)
17. CommScope (CTV)
18. Teradata (TDC)
19. OfficeMax (OMX)
20. SLM Corp (SLM)

As you can see, this list is quite different from the most popular stocks amongst hedge funds. The 'most popular' list we detailed last week includes more mega cap, mainstream stocks. The Hedge Fund Generals list, on the other hand, contains a lot of special situation and edgy stocks that hedge funds are betting will soon see catalysts.

The HF Generals list does include a few intriguing stocks that we've focused on in the past. Just recently, we touched on why hedgies like Mead Johnson Nutrition (MJN). Also, various long/short equity funds that we track have been moving in and out of Teradata (TDC) for a few quarters now. Carl Icahn has been busy with his activist stake in Take-Two Interactive as he hopes to generate shareholder value. Chris Shumway's hedge fund Shumway Capital Partners has a large stake in Equinix (EQIX). Additionally, it was very interesting to see Palm (PALM) on this list given that many hedge funds have been short the name and shares have been in a proverbial deathspiral. And lastly, we note that a few of the hedgies we specifically track have previously held positions in Wendy's Arby's Group. However, of the funds MarketFolly focuses on, many have reduced their stakes and/or sold out of WEN in recent quarters.

Overall, while hedge funds saw some rotation in the fourth quarter, IT and Healthcare were the most favored sectors while telecom was the least favored. Additionally, BofA wagers that hedgies are still bearish on REITs and that hedge fund cash levels have returned to pre-crisis levels as well. Embedded below you will find Bank of America Merrill Lynch's entire quarterly hedge fund report. RSS & Email readers will need to come to the site in order to view it:




You can directly download a .pdf here.

For more coverage on specific hedge fund portfolios, head to our tracking series. And for more broader data like the above, head to Goldman Sachs' VIP list of popular hedgie holdings as well as BofA's recent report looking at hedge fund exposure levels that concludes they favor high quality growth stocks.

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.

Long/Short Hedge Funds: Lowest Net Long Exposure Since May 2009

We're back with this week's edition of Bank of America Merrill Lynch's hedge fund monitor report. Last week, their report focused on how hedge funds continued to de-risk. This time around, we see that the de-risking trend continued as hedge funds sold equities, oil, and the euro.

By far the most notable takeaway from this report is the fact that long/short equity hedge funds continued to de-risk and reduced market exposure down to 27-28% net long exposure and this is the lowest level since May 2009. Shifting to other fund strategies, the report found that market neutral hedge funds increased their equity exposure, while global macro hedge funds held their equity exposure steady. Macro funds were also selling emerging markets.

Below you will find the entire Bank of America Merrill Lynch hedge fund monitor report. RSS & Email readers must come to the site in order to view it.




We'll continue to cover hedge fund movements on a daily basis. In the mean time, check out more research from Bank of America where they recommend to overweight stocks and underweight bonds. For more insight as to what hedge funds are investing in, we've previously examined the top stocks held by hedge funds as well.