market folly

Bank of America Merrill Lynch is out with the latest rendition of their hedge fund monitor report. Last week we took note that hedge funds had increased short exposure yet were still suffering poor performance. The May performance numbers for many hedge funds were terrible, and June wasn't a ton better for many. In June, distressed credit funds were down 1.66% and long/short equity funds lost 1.09%. So, how have hedge funds positioned themselves lately after such poor performance?

Long/short equity hedge funds continue to have low net long equity exposure at around 27% net long. This continues to be well below the historical average of 35-40%. L/S funds still slightly favor growth stocks over value at the moment. And while these hedge funds have favored high quality stocks for quite some time, this exposure is volatile and some funds have reduced exposure in this regard recently. Market neutral funds, while as of late they've taken opposite positions of L/S funds, are now flat in terms of equity exposure. Global macro hedge funds on the other hand have reduced emerging markets exposure and covered their short position on US indices. You'll recall previously that we highlighted how global macro funds were net short equities and they certainly banked on that trade.

Based on CFTC data, however, other hedge funds (large speculators) have added to their short positions in both the S&P and Russell 2000. Bank of America Merrill Lynch highlights two recent hedge fund portfolio moves of note. Firstly, they point out that hedgies are now in a crowded long in the Japanese Yen. Secondly, they highlight the net short position in Nasdaq futures that many speculators have put on.

To see the latest hedge fund exposure levels, view the full monitor report from BofA embedded below:



You can download a .pdf copy here.

You can also view previous exposure reports where we saw hedgies increasing short exposure. So while hedge funds clearly are having a hard time with this tape, market strategist Jeff Saut says that the answer is in risk adjusted stock selection and risk management, two solutions he lists as keys to portfolio success in 2010. We'll continue to monitor the latest hedge fund exposure levels to see who is able to generate some alpha out there.