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.

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.

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.

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.

Gold as an Insurance Policy (and When to Sell It)

Societe Generale is out with some well thought out research on everyone's favorite precious metal: gold. The global strategy research piece is called "Popular Delusions: When to sell gold." In it, the argument is made that gold is not really an investment, but rather a speculative tool.

The most intriguing thing about this precious metal is perhaps the vast array of reasons that investors are purchasing it. Some use it to hedge, some are making a speculative wager, while others use it to bet against fiat currency or protection from inflation. In SocGen's research, they examine gold primarily as an insurance policy. And they interestingly point out that, "Indeed, during the '6000 year gold bubble' no one has defaulted on gold. It is the one insurance policy which will pay out when you really need it to."

The author is using gold as an insurance policy against developed market governments failing. They note that the crises we've seen in Dubai and now Greece are just the first few drops in the bucket. In the end, they conclude that it will be time to sell gold when "political winds change direction and become blustering gales forcing us onto the course of fiscal sustainability." So, there you have their argument for gold as an insurance policy.

In another corner, you have hedge fund rockstar John Paulson who is using his new gold fund to bet against fiat currency, and in particular, the US dollar. We also just recently examined the dynamic between gold, the dollar & gold equities.

Global macro hedge fund Woodbine Capital, on the other hand, sees gold as the anti-goldilocks. They've owned gold as well as out of the money puts on the metal. They're not using it as a hedge for inflation or deflation. Instead, they're wagering on it as part of their theme of increased emerging market demand.

Additionally, we've also see John Burbank's Passport Capital's rationale for owning physical gold. They own it because of its supply/demand dynamic as well as central bank action, among other reasons. David Einhorn's hedge fund Greenlight Capital was one of the first to store physical gold. We've also seen others use it as a diversification tool in their portfolio. Lastly, we saw Dan Loeb's Third Point at one time use gold as a fat tail risk and doomsday trade. Obviously, the reasons to own gold vary. The research below now presents gold as an insurance policy.

Embedded below is Societe Generale's look at the precious metal and when to sell it. It's a great objective take on the metal and worth the read:



You can directly download a .pdf here.

As you can see, there are a myriad of reasons to own the metal. It's hard to say though whether or not everyone would be selling for the same reason in the end. SocGen argues that the time to sell gold will be when fiscal sustainability is achieved, but this is because they view the metal as an insurance policy. When or why others might sell the metal is yet to be determined and something we haven't seen discussed at length. That's the crazy thing about gold, everyone seems to own it for different reasons. In markets, when to buy is one thing. But many great investors will tell you that it's when you sell that matters most.

For more on gold, we've posted copious amounts of hedge fund research and highly recommend reading the following:

- John Paulson's gold fund: an in-depth look
- Global macro hedge fund Woodbine's research, Gold: The Anti-Goldilocks
- Passport Capital's rationale for owning physical gold
- A look at the dynamics between gold, the dollar & gold equities

Hedge Funds: Shortest Position Ever Against the Euro

Based on data reported to the CFTC, Societe Generale has released their latest monthly hedge fund report that examines what speculators are buying and selling across various asset classes. Their research indicates that hedge funds have again turned to sellers of US equities, but on a smaller level than before. This is something we saw last week when we noted hedge funds had their lowest net long position in equities since May 2009.

By far the most notable takeaway from the data though is the fact that hedge funds now have the most short position against the euro ever. €11.5 billion are short the euro, an astonishing figure. This is partially offset by a €4.4 billion long euro position, leaving a net short position of €7.1 billion. This of course is a result of Greek's sovereign issues and weak policy response. In commodities, they see that funds have deleveraged across the board. Overall, deleveraging and de-risking continue to be prevalent themes.

Embedded below is Societe Generale's monthly hedge fund report thanks to a Brazilian reader in New York:




You can also directly download a .pdf here.

To see what equity hedge funds have been buying and selling, you can stay up to date with our hedge fund portfolio tracking series and our coverage of a prominent hedge fund panel.