market folly

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.'