Latest Hedge Fund Exposure Levels in Various Asset Classes

Societe Generale is out with their latest hedge fund watch and we see that overall, hedgies are very long the Swiss franc and have increased long positions in oil. Let's take a look at SocGen's round-up of hedge fund exposure to the various asset classes.

With regard to equities, Societe Generale finds that hedge funds as a whole are astonishingly 'neutral' on the markets. While a few funds have net shorts on the S&P, the main area hedgies are maintaining short positions are in small caps with the Russell 2000 (which investors typically play via the IWM exchange traded fund). In our particular coverage, we've seen many hedge funds favor high quality stocks essentially as placeholders in a portfolio given the somewhat tepid economic environment.

In bonds, they note that many funds had net short positions but they've been forced to square those positions as double-dip fears returned. SocGen notes that hedgies are somewhat long 10 year treasuries though as the second round of quantitative easing looms large. Back in May when the market started to panic, Broyhill's Affinity hedge fund outlined ten reasons to buy bonds.

Possibly the most notably change in terms of asset class exposure would be the uptick in commodity positions. As the dollar has weakened, many hedge funds believe commodities will benefit from quantitative easing round two. Specifically, these funds prefer positions in oil with a large net long position. At the Value Investing Congress recently, John Burbank of Passport Capital said that he is fond of hard assets/commodities.

Embedded below is Societe Generale's latest hedge fund watch report:



You can download a .pdf copy here.

If you're looking to see what specific equities hedge funds have been honing in on, be sure to stay up to date with our coverage of the latest SEC filings.

Hedge Funds: Very Short 10 Year Treasuries

Societe Generale is out with the latest edition of their hedge fund watch and in it we see that they've found hedge funds to have the "shortest position ever on bonds." That language is slightly misleading as they've only been tracking these exposure levels since 2005, but still. The fact that hedge funds have more than 270,000 short contracts on the 10 year treasury bond certainly speaks volumes. This comes a few weeks after SocGen initially published research that hedgies were net short 10yr Treasuries. It's very evident that hedge funds are concerned about inflation and the impending Federal Reserve rate hike (whenever it may eventually come). As we've covered numerous times in the past, many hedge funds have put on curve steepener trades in order to play this.

As you'll see from the chart below, hedgies certainly are short bonds:



In their research, SocGen also found that hedge funds still had large short positions in 30 year treasuries as well. They've been net short all year to the degree of around 100,000 contracts on average. So, they are certainly short the 10 year to a larger degree than the 30 year. Retail traders/investors who want to piggyback this play can short the exchange traded fund IEF for the 10 year and TLT for the 30 year. And as always, keep in mind that this should not be construed as a recommendation to buy/sell various securities.

Societe Generale's other main conclusion regarding hedge fund exposure levels was that hedgies are "strong net sellers of the yen (50,000 contracts net short)." Additionally, we see that hedge funds are buying US dollars in spades against all the other major currencies. This falls in line with what we've seen recently as hedge funds were aggressively short the yen. Interestingly enough, after re-shorting the euro recently, we now see that short positions on the euro have been reduced over the past few weeks. If you don't have access to forex markets, you can play the yen via exchange traded fund FXY. You can also play the US dollar via UUP and the euro via FXE.

Lastly, turning to equities, we see that their research comes to similar conclusions as the Bank of America research we typically cover. In that report, we saw that the smart money was selling equities. SocGen confirms this writing, "even though index price is rising, the percentage of non commercial positions on total open interest on the S&P 500 has decreased significantly." Their research shows that hedge funds are now net sellers of the S&P 500 while still slightly net long the Nasdaq.

Embedded below is Societe Generale's latest hedge fund watch document:



You can download a .pdf here.


So, the trend remains in tact. Hedge funds are pushing the limits on a steep yield curve as this is certainly a crowded trade. Hedgies are massively short the 10 year treasury but also have quite a trade against the 30 year treasury as well. While some agree that inflation is not a near-term problem and instead is a long-term concern, it's very apparent that hedge funds anticipate interest rates to rise in the future. For more on the latest hedge fund exposure levels, head to our post on how hedgies are selling equities.