market folly

Bank of America Merrill Lynch has released their weekly hedge fund monitor that updates the latest exposure levels from hedgies. Last time around, we saw that global macro hedge funds were short equities. This time, we see that they've been aggressively covering the euro. Obviously due to the European turmoil in recent months, hedgies have been very short the euro. Thus, this interruption in trend is worth pointing out.

Hedgies have been short the euro in size and so volatility will most likely continue in the forex market. To put this euro position in perspective, hedge funds were short -$13.4 billion notional as of two weeks ago. Last week, this position decreased to -$7.7 billion notional. The euro has essentially been in a 'crowded short zone' for much of 2010 so there is always that pressure of a sudden short squeeze. Bank of America thinks such a squeeze at best would take the Euro up to 1.30 but they don't see that happening anytime soon.

Shifting to equities, one trend worth highlighting is the fact that many hedgies continue to sell the Russell 2000 futures. In energy, it appears as though hedge funds were buying crude oil. Additionally, they remain long metals.

Long/short equity is one of the best performing strategies this month, up 0.33%. This is in stark comparison to last month where May was a brutal month for many prominent long/short operators. Position wise, we see that this strategy overall has increased its market exposure. Don't put too much weight on that though, as they are only 25% long, way below the typical range of 35-40% net long. Long/short funds also reduced emerging market exposure last week.

Shifting to market neutral funds, we see that recently they've reduced market exposure. Over the past few months it seems as though m/n funds and l/s funds have moved completely converse of each other with regard to equities. When l/s funds go long, market neutral funds seem to sell and vice versa.

Global macro hedge funds have been adding to shorts in commodities as well as in 10 year treasuries. Additionally, they've been adding to longs in the US dollar. This trade has become an opposite reflection of the one many funds put on during the crisis. (Back then, they were long commodities and short the dollar). As we detailed last week, global macro players have been net short equities in recent weeks and we see that they've continued to hold these positions.

Embedded below is Bank of America Merrill Lynch's latest hedge fund monitor report:



You can download a .pdf copy here.

For more on the topic of position movements, head to our examination of the hedge fund herd mentality as well as our continuous portfolio tracking series.