Hedge fund leverage has been on the rise over the past few months. We have already covered the topic several times in 2013. According to the latest data the trend has continued and is close to the peak reached in 2007. BAML is out with its latest weekly hedge fund monitor (although they skipped last week). In the report issued on Sunday the 5th of May, BAML notes that hedge fund leverage is now at $380 billion, which is only $1 billion short of the high reached in 2007. For all intents and purposes, hedge fund leverage is basically at an all time high.
More on hedge fund leverage and other notable trends below
Net Free Credits the lowest since 2000 Leverage almost reaches the 2007 high
Net Free Credits from the NYSE Margin Debt data is essentially a measure of cash levels in margin accounts. Cash balances in margin accounts went down to a negative $92.2 million in March – the lowest since 2000.
Leverage, as measured by NYSE Margin Debt, rose 28.3% year-on-year (YoY) and 3.66% month-over-month (MoM) to $380bn in March, slightly below the July 2007 peak of $381bn. Leverage can be used as a sentiment indicator because it is related to investor confidence. It tends to be correlated with the direction of the equity market – investors are likely to gain confidence and add leverage when the equity market is going up and vice versa.
Current levels of both Net Free Credits and Margin Debt indicate extremely bullish sentiment in the equity market. Although it should not be used as a market timing tool, the implication is contrarian bearish.
Examining Hedge Fund positioning by major strategies
BAML models indicate that Market Neutral funds bought market exposure to 10% from 7% net long or the highest since June 2012. Equity Long/Short bought market exposure to 41% from 40% net long, above the 35-40% benchmark level.
Macros continued to add to their shorts in risk assets including the S&P 500, NASDAQ 100 and commodities. In addition, they added to their shorts in 10-year Treasuries, while slightly selling USD. Meanwhile, they added to their long positions in EAFE and short positions in EM.
Significant HF moves across asset classes based on CFTC data
Equities: Large specs bought the S&P 500, NASDAQ 100 and Russell 2000. NASDAQ moved into a crowded long; S&P 500 remains in a crowded long.
Agriculture: Large specs bought soybean and corn, and halved their shorts in wheat. Readings are neutral.
Metals: Large specs sold gold & silver, bought platinum & palladium, and partially covered copper. Gold and Silver are in a buy zone.
Energy: Large specs bought crude oil, partially covered heating oil, were flat in natural gas, and sold gasoline. Heating oil remains a crowded short.
FX: Large specs sold USD, partially covered Euro & Yen. Readings are neutral.
Interest Rates: Large specs aggressively bought 30-yr Ts, bought 10-yr Ts, and sold 2-yr Treasuries. 30-yr & 10-year moved into a crowded long.