market folly

Bank of America Merrill Lynch's second quarter hedge fund report has come up with some interesting conclusions based on recent activity. While hedge funds had a brutal May and June performance wise, July was a little bit more friendly. Year to date, distressed credit is the best performing strategy, gaining 3.56% with convertible arbitrage coming in second, up 2.41%. While hedge fund performance was slightly down in the first quarter, the second quarter was much worse as hedgies finished Q2 down 2.5%.

In terms of asset flows for the second quarter, hedge funds saw $9.5 billion in net inflows, and interestingly enough $7.9 billion of that flowed into relative value strategies. Additionally, the fact that the majority of capital went to 'mega' hedge funds should come as no surprise as investors love the big names. Over 92% of capital inflows went into funds with greater than $5 billion in assets under management. According to HFR Industry Reports, these mega funds now manage around 60% of the capital in the industry.

Turning to recent exposure levels, long/short funds have well below historical exposure as they are now only 21% net long equities. It has been this way practically all of 2010 as they continue to reduce exposure. Two weeks ago, these funds were 30% net long and historically, funds have been net long 35-40%. Earlier this morning we saw that Dan Loeb's hedge fund was only slightly out of this range at almost 32% net long.

Bank of America Merrill Lynch's hedge fund monitor report recently detailed the fact that long/short equity hedge funds reduced market exposure while market neutral funds increased exposure. These two fund strategies have been dancing conversely of one another in equities as market neutral tend to do the exact opposite of l/s funds. This is a theme we've seen play out over the past few months.

Regarding other recent notable asset class moves, BofA highlights that numerous large speculators sold positions in gold and silver. That much was obviously evident given the big moves we saw in those markets over the past few weeks. In crude oil, funds were definitely buying and that has continued into this week. For a closer look at how 'black gold' is trading, head to some technical analysis of crude oil.

In currencies, hedgies covered their shorts in the euro and held their long position in the US dollar. Turning to interest rates, many hedge funds added to their shorts of the 30 year treasuries and 10 year treasuries. Embedded below is Bank of America Merrill Lynch's hedge fund monitor report:



You can download a .pdf copy here.

To follow specific investment manager activity, we point you toward our hedge fund portfolio tracking series. Additionally, we've covered numerous hedge fund letters worth reading as well.