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 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.

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 Net Short 10 Year Treasuries: Societe Generale Research

Societe Generale is out with their monthly hedge fund watch and we thought we'd highlight some of the takeaways of what they're seeing. Their research indicates that on a whole, hedge funds are very long the US dollar against the euro, UK pound sterling, and Japanese yen. Additionally, they are seeing funds long the Nasdaq and short bonds. This comes after we just recently saw Bank of America's research that hedgies were aggressively selling the yen.

One of the main talking points as of late has been that hedge funds have increased net shorts against 10 year treasuries. Curve steepeners have been a favorite trade of alternative investment managers and 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. As we just covered earlier this morning in Byron Wien's ten surprises for 2010, we saw that The Blackstone Group's Senior Managing Director sees yields on the 10 year rising to 5.5% or above. Below is a chart illustrating just how much short exposure hedgies have right now in long-term bonds:

(click to enlarge)

In currencies, hedgies continued to aggressively sell the euro and again this falls right in line with previous research we posted up that concluded that hedgies were re-shorting the euro. SocGen opines that hedgies are now net short 80,000 contracts. Turning to energy, we see that funds are long commodities and are very long oil, a commodity that has been looking to breakout. Hedge funds are also apparently still bullish on gold, despite reducing their net long positions it appears. You can view all of the hedge fund research on gold we've covered in the past as there's a plethora of resources.

Embedded below is Societe Generale's monthly hedge fund watch report in its entirety where you can examine their exposure levels across various asset classes:



You can directly download a .pdf here.

So, hedge funds in general seem to really be gravitating (i.e. crowding) three main trades right now: shorting long-term treasuries, shorting the euro, and going long oil. To see what other movements big hedge funds are making, head to our post on how they aggressively sold the Japanese yen and an in-depth look at how they had previously been re-shorting the euro. And for more market research specifically from Societe Generale, we've posted up their thoughts on gold as an insurance policy as well.

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.

Cazenove's Listed Hedge Funds Dispatch

Expanding further upon 'document dissemination' day here at Market Folly, we'll turn next to JPMorgan & Cazenove's listed hedge funds dispatch report. Earlier today we've already posted up Credit Suisse's monthly hedge fund report as well as QB Asset Management's shadow price of gold report. The below document was produced by JPMorgan Cazenove in London and hasn't been produced in the United States, so this particular piece might be of more relevance to our UK based readers.

An interesting takeaway from their research is that in 2009, out of all the publicly listed hedge funds in the UK, Dan Loeb's Third Point was the best performing fund. For 2009, Third Point's listed product was up 41% compared to a gain of 20% for the HFRI Fund Weighted Composite.

We've of course covered Third Point's portfolio in-depth and just recently posted up one of their recent portfolio maneuvers. (Additionally, we've also posted up Third Point's commentary for those interested as well). Other solid performers in 2009 included Cayenne as well as Boussard & Gavaudan. Cazenove's research is an intriguing look at the listed hedge fund space with some comprehensive data.

Embedded below is the full report:



You can directly download the .pdf here.

Overall, Cazenove concluded that there are plenty of quality names in the listed hedge fund space and that these solid names will be "the bedrock for the sector's survival and growth." Be sure to check out all the rest of the hedge fund research we've been posting up recently.

Credit Suisse Monthly Hedge Fund Commentary

Continuing document dissemination day here at Market Folly, we wanted to present you with Credit Suisse's monthly hedge fund commentary. Though the report is from February, it still does an excellent job of framing how hedge funds have positioned themselves from the year and where their gains or losses have been coming from. Additionally, you'll get a look at Credit Suisse's Tremont hedge fund index and its performance. This research joins the commentary we posted up yesterday where we saw hedgies were re-shorting the euro and buying equities.

In the report, they present findings relating to various fund strategies and we just wanted to quickly touch on some highlights. One of the interesting things we took away from their research was their data on managed futures funds. They note that from the period of 2007 to 2009, managed futures correlation to equities dropped. As such, these funds saw positive performance in the crisis but negative performance during the great equities rally in 2009.

Turning to event driven funds, they found that many managers in this arena felt that 2010 would be much more conducive to deal-making and as such would provide them with ample portfolio opportunity. Dan Loeb of hedge fund Third Point LLC certainly agrees with this and made special note of event driven opportunities in his recent investor letter. In regards to global macro funds, Credit Suisse actually found that many funds held fewer strategic positions as there was a range of uncertainty surrounding governments and central banks toward the beginning of the year. We've covered the thoughts of a few global macro funds on the site including Prologue Capital's recent commentary and some past thoughts from Woodbine Capital where they thought that the most important macro issue was global rebalancing.

Overall, the report is an interesting glimpse at how various fund strategies have been positioned in the first quarter of the year. Embedded below is monthly research from Credit Suisse and their Tremont hedge fund index:



You can directly download a .pdf here.

For more hedge fund research that we've covered, check out Bank of America Merrill Lynch's recent hedge fund trend report as well as Goldman Sachs' list of most important stocks for hedge funds.

The Shadow Gold Price: Research From QB Asset Management

Today is a bit of a 'document dissemination' day here at Market Folly and we wanted to highlight two pieces from Lee Quaintance and Paul Brodsky's QB Asset Management regarding gold. Below you'll find Nouriel Roubini's argument, "The New Bubble in the Barbaric Relic that is Gold" as well as QB's counterargument to Roubini's points. But first, we'll begin with QB's stance on the precious metal through their original research.

Their research, entitled "The Shadow Gold Price" focuses on the hotly debated precious metal of ages. The first thing you'll notice about this piece is that it is dated November 2008, right in the heart of the crisis. What's intriguing here is that they take a look at the current monetary system and compare it to one anchored to gold. Elaborating on their research, they then go on to develop the shadow gold price (a hypothetical intrinsic value for money/gold). Lastly, they apply this shadow gold price to the US equities market to establish relative value. In the piece, they also made the case for buying equities "hand over fist" which obviously turned out to be an excellent market call.

Overall, QB concluded that there is extraordinary risk in holding paper money and long term bonds. (We've long noted how many prominent investors have at some point been short long term bonds in one form or another). Additionally, they felt that commodity markets were cheap across the globe in nominal terms back then. While the letter itself is dated, the fundamental research and theoretical framework are still very relevant and worth reading.

Embedded below is QB Asset Management's research, "The Shadow Gold Price":



You can directly download a .pdf here.


Then, turning to more recent research out of QB Asset Management, we see that Lee Quaintance and Paul Brodsky have penned a response to Nouriel Roubini's December 2009 report on "The New Bubble in the Barbaric Relic that is Gold." QB takes issue with Roubini's comments, arguing that "gold's terminal value in this cycle will be multiples higher than current pricing." Below you will find a document that both presents Roubini's argument on gold as well as QB's counter-argument in a fascinating 'back and forth' style debate which we highly recommend reading:



You can directly download this .pdf here.

No matter your viewpoint on this often talked about precious metal, you have to admit that there has been a massive amount of in-depth research and rational arguments made on both sides of the coin (no pun intended) from a fundamental standpoint. If you're looking for even more resources, we've posted up a plethora of gold related hedge fund research and below you'll find the archives:

- Societe Generale's research: gold as an insurance policy (& when to sell it)
- An in-depth look at John Paulson's new gold fund
- The dynamic between gold, the dollar & gold equities
- Global macro hedge fund Woodbine Capital's thoughts on gold
- John Burbank & hedge fund Passport Capital's rationale for owning physical gold

And if technical analysis is more your style, you can head to a recent video analysis of gold here as well.

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.

Top Hedge Fund Long & Short Positions: Goldman Sachs Report

Goldman Sachs is out with their latest hedge fund trend monitor report and they've highlighted some key takeaways from the slew of fourth quarter SEC filings and portfolio disclosures. Focusing on hedge fund exposure to equities, they note a broad trend of rotation into industrials and out of information technology. Goldman interestingly notes that this is the first time since 2005 that hedge funds are underweight IT.

Now, let's dive into the good stuff.

Here's a list of Ten Stocks That Most Frequently Appear In Hedge Funds' Top Holdings:

1. Apple (AAPL)
2. Pfizer (PFE)
3. Bank of America (BAC)
4. Google (GOOG)
5. JPMorgan Chase (JPM)
6. Microsoft (MSFT)
7. Mastercard (MA)
8. DirecTV (DTV)
9. Wells Fargo (WFC)
10. CVS Caremark (CVS)


Also, we wanted to highlight the Top 10 Stocks Added Most By Hedge Funds In Q4:

1. Mead Johnson Nutrition (MJN)
2. Wells Fargo (WFC)
3. Citigroup (C)
4. Amazon (AMZN)
5. 3Com (COMS)
6. Hewlett Packard (HPQ)
7. Wellpoint (WLP)
8. Black & Decker (BDK)
9. CVS Caremark (CVS)
10. Jefferies (JEF)


This is pretty much right in line with what we've seen when we've detailed hedge fund portfolios as we've noticed prominent managers picking up shares of MJN, WFC, and CVS in particular.

Based on various short disclosures, Goldman has also estimated what short positions a 'typical' hedge fund would employ. This hypothetical portfolio would be short the likes of Haverty Furniture (HVT), Lifeway Foods (LWAY), Great Southern Bancorp (GSBC), Travelzoo (TZOO) and many other names.

In their trend monitor report, Goldman concludes the same thing we've detailed previously: that hedge funds have recently de-risked, having spent the vast majority of 2009 re-risking before that. Some other research we've looked at has even indicated that hedge funds have their lowest net long equities position since May 2009. Also, an interesting tidbit from Goldman's research: they conclude that hedge funds use exchange traded funds (ETFs) as a hedging tool, rather than for directional bets.

Probably the most intriguing thing to note from Goldman's research is their conclusion regarding the impact of timelag in these position disclosures. Goldman writes, "Importantly, we believe our analysis of December 31 hedge fund holdings based on filings made in mid-February is probably more reflective of actual current holdings than many market participants are inclined to believe. Hedge fund holdings turnover is lower than most expect, as highlighted previously. Most securities (68%) that were in hedge fund portfolios on September 30, 2009 also appeared in portfolios on December 31, 2009. Because the overall holdings picture was surprisingly constant, it is reasonable for us to believe the most recent holdings data is not so 'out-of-date' as some might suggest."

They also draw attention to an obvious fact: hedge fund returns are largely reliant on the performance of a few stocks, usually their top holdings. This is why we like to track concentrated funds on the site even more, as their holdings are typically higher conviction plays. There are many investors out there in hedge fund land, and when it comes to equities, you have to know who to track. This is something we strive for on a daily basis as we've compiled a great list of hedge funds to track.

Below you will find Goldman Sachs' entire hedge fund trend monitor report as an embedded document. RSS & Email readers will need to come to the site in order to read it:



Overall, an impressive set of in-depth research well worth the read. And, importantly, their conclusions and findings fall directly in line with what we've discovered in our constant hedge fund coverage. The essential non-issue of the timelag between the portfolio disclosure date (12/31/09) and the date when the filings are released to the public (2/15/10) is very notable. When following hedge fund movements, you have to focus on their core positions and ideally you want to trail equity funds that have long-term time frames, typically employ value strategies, and run concentrated portfolios. To see what specific positions prominent hedge funds are buying, head to our hedge fund portfolio tracking series and our coverage of hedge fund investor letters.

Hedge Fund Exposure Levels: Still Very Long Equities

Bank of America Merrill Lynch is out with some recent data on hedge fund portfolio positioning as of the first week of December. Per their hedge fund monitor report, we see that hedge funds were still very much long equities as they have overweighted that asset class as well as energy and precious metals. We also learn that they were covering shorts in 10-Year Treasuries and the US dollar index. Those two short positions have been widespread in hedge fund land for some time now as hedgies bet on inflation via rising rates and a weak dollar. While in the past we've covered specifics like what ten stocks are most popular amongst hedge funds, we're taking a step back today to highlight the broader picture.

Overall Exposure Levels

Long/Short Equity Hedge Funds: While most L/S funds typically have had 30-40% net long exposure historically, December kicked off with hedge funds net long by around ~45%. This comes after long/short funds had hit a multi-year high level of 50% net long in mid November. Some recent action by these funds suggest that their inflationary expectations are declining and they have been shifting from value and high quality names into small cap names.

(click to enlarge)

Market Neutral Hedge Funds: They note that market neutral funds have stuck to their name and have gone back to 'neutral,' having spiked in weeks prior. Overall, they are largely neutral on equities and have negative inflationary expectations.

Global Macro Hedge Funds: Additionally, global macro hedge funds have been in a 'crowded long' of the S&P 500 and have also been in an even more crowded long of emerging markets. Bank of America Merrill Lynch's readings on net long emerging market positions are at the highest they have been since August 2008. They also apparently have been selling 10-Year Treasuries and have been modestly covering shorts on the US dollar (a crowded trade).


Commodities

We also now want to turn to commodity exposure levels as they have taken center stage again with Gold's parabolic rise.

Gold: Their research indicates that in the first week of December, large speculators were selling gold. However, this is still very much a crowded trade to the longside. They note that gold completed what they call a 'head and shoulders continuation pattern that projects up to $1300-1350.' So, interesting to see their price targets on the precious metal as those levels fall largely in line with technical analysis price targets on gold that we've seen. Also, we've recently covered the latest offering from hedge fund icon John Paulson. Those interested in gold should read his rationale in our in-depth post on his new gold fund.

Silver: They are noting that large speculators were buying silver somewhat at the beginning of December and that it is stuck in a trend channel. Their target upside is in the $20 area and they see support in the $14-15 range. The long-term upside target on silver is an old high of $50.

Copper: Well, Dr. Copper was holding steady as large speculators pretty much left their net long position unchanged. They note that copper has an upside potential to $350 while they are identifying support in two areas: $290 as well as $260.

Platinum: Large speculators mildly increased their bets on this metal in the first week of December. After falling off last year due to weak automotive demand, the metal has bounced back and has support at $1250 and resistance at $1500 according to Bank of America Merrill Lynch's research.

Crude Oil: In this commodity, large speculators held their steady net long positions as of the first week of December, having been selling at the end of November. They note that crude has been trading in a sideways range of around $65-75 since July and a breakout above this area would obviously prove to be bullish. They end their note saying that the "crowded long position remains a contrarian negative." We also recently highlighted a technical analysis video on crude oil that identified a potential pattern in this commodity as well.

Natural Gas: This commodity has been on a deathspiral for some time and it looks set to continue. As of the first week in December, large speculators were holding their deep net short position. Bank of America Merrill Lynch has commented on current action, saying it "appears to be in a broad base-building process."


Fixed Income

Moving lastly to fixed income, we thought it would be prudent to check in on hedge fund positioning as it relates to US Treasuries. As we've detailed on Market Folly before, there have been tons of prominent hedge fund managers involved on the short side of this trade. Many prominent hedge funds and market gurus have previously warned of inflation and have shorted long-term US treasuries. 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).

There are also managers playing the other side of the trade as bond vigilante Bill Gross of PIMCO is betting on deflation and has been buying treasuries. What's interesting here is that technically, both sides of the trade can win. One side of the trade could profit from short-term ebbs and flows, while the other side of the trade could win out in the long-run. It will arguably take years for the final verdict to play out, but that doesn't mean money can't be made in the mean time.

Here is the latest hedge fund positioning on 30-Year Treasuries, 10-Year Treasuries, as well as 2-Year Treasuries:

(click to enlarge)

That wraps up Bank of America Merrill Lynch's coverage of hedge fund exposure levels as of the first week of December. While it's good to see overall hedge fund exposure levels, those of you wanting more specific positions can head to our post on the top ten stocks owned by hedge funds. It's interesting to see how hedge funds are positioned heading into the close of the year and we're sure they'll be adjusting once the new year starts as well. To see how hedge funds might position themselves for next year, check out ten investment themes for 2010.

Top Ten Stocks Held By Hedge Funds

Thanks to the fine folks at FINalternatives, we see the latest quarterly Hedge Fund Monitor Report out of Bank of America Merrill Lynch. These quarterly reports are along the same lines of what we do here at Market Folly in that they examine hedge fund portfolios. Rather than focus on a unique set of funds like we do, they survey the majority of the industry landscape to frame a 'top hedge fund holdings' list.

This data is very useful for those of you wondering which stocks are most widely held amongst hedge funds and we presented the hedge fund data from Q2 earlier on the blog. In the third quarter, hedge funds increased their long equity holdings as gross exposure was up 14% and net exposure was up a whopping 130%.

The ten most popular stocks held by hedge funds include:

1. Bank of America (BAC)
2. Pfizer (PFE)
3. JPMorgan Chase (JPM)
4. Microsoft (MSFT)
5. Citigroup (C)
6. Apple (AAPL)
7. Google (GOOG)
8. Qualcomm (QCOM)
9. Cisco Systems (CSCO)
10. Walmart (WMT)
    

Embedded below is Bank of America Merrill Lynch's Q3 Hedge Fund Monitor Report. RSS & Email readers you will have to come to the blog to view the report & as always we recommend using 'full screen' mode to read the document:






Additionally, you can view the hedge fund trend monitor report from last quarter here.