market folly

Bank of America Merrill Lynch is out with the latest iteration of their hedge fund monitor report and we get a glimpse at the latest exposure levels. If you like to follow the smart money, then you should highly consider selling equities because that's exactly what hedge funds are doing. Last week we posted that hedge funds had below average net long exposure and we see this trend continues. Long/short equity funds are now around 25% net long, which is definitely below their historical average of 35-40% net long. Of their long positions overall, hedgies favor small cap and low quality 'junk' stocks. Last week we also touched on how there is a divergence between l/s funds and market neutral funds. This divergence continues as market neutral funds are still net long equities (but they did reduce some beta exposure).

We also see that according to CFTC data, many hedgies have been adding to shorts in S&P futures. Whether they are simply selling longs to lock in some profit or making a market timing call, one thing is clear: hedge funds are definitely cautious in this market. We also got confirmation of this trend from David Einhorn's hedge fund Greenlight Capital. In their latest investor letter, Greenlight discloses that they were 100% long and 70% short, leaving them 30% net long for the first quarter. This is right along the lines of what we've seen across industry-wide data sets.

Turning now to other significant asset class moves from hedgies, we see that they were adding to longs in crude oil and pressing deep shorts in natural gas. Additionally, hedge funds continue to pound the euro short. In interest rates, we learn that for the third consecutive week, hedge funds have very crowded shorts in 10 and 30 year treasuries as they short the long end of the curve. Curve steepeners continue to be hedge fund land's favorite drug.

Lastly, we also get a performance update from BofA regarding their hedge fund generals list. This is a basket comprised of stocks widely owned by hedge funds. It is up 13% year-to-date for 2010 and for 2009, the HF generals index was up 69%. You can compare these figures against individual hedge funds in our first quarter performance numbers post.

Embedded below is Bank of America Merrill Lynch's latest trend report on hedge fund exposure levels:



You can download a .pdf here.

So, the trend remains much of the same across hedge fund land as of late. Hedgies are selling equities, shorting the long end of the yield curve, shorting the euro, and longing crude oil. You can view BofA's previous hedge fund trend report here and make sure to also check out their hedge fund generals list to see what stocks hedge funds love most.