market folly

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.