market folly

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.