The risk-on strategy by hedge funds and other money managers seems to have picked some up steam ever since the beginning of 2013. The cash balance in margin accounts read at the end of April by NYSE Margin Debt had risen past the 2007 record highs. NYSE Margin Debt, which is an indicator of investor confidence, closed at $380 billion at the end of March and then rose 1.3 percent to $384.4 billion in April, thus surpassing the all time record of $381.4 billion borrowed against investments in 2007.
Margin Debt Rose 29%
The trend of staying optimistic has been in play since January, when margin debt rose 29 percent y-0-y from April 2012. Investors are borrowing increasingly while making their bets. The riskier approach of increasing leverage also means greater losses in the event of decline, but the rally in stock markets and housing sector seems to have allayed such fears for the time being.
With the +18 percent increase in S&P 500 (INDEXSP:.INX) for the year so far, hedge funds have been zealously increasing long bets while paring their short positions. The bulk of short biased hedge funds have lost in this year and the strategy has been the worst performer so far. HFRI Short Bias Index detracted 2 percent in April, compounding a loss of -6.7 percent YTD. On the other hand HFRI Equity Hedge is up 5.5 percent for the year. EurekaHedge’s Long Only Absolute Return Index is up 6.6 percent over the same period. Natixis has also noted the underperformance of shortsellers, estimating that on average each lost 12 percent in 2013.
The net longs in S&P 500 (INDEXSP:.INX) and NASDAQ 1000 futures have also touched record highs in this year, BAML and SocGen have noted the same. However according to the most recent update from the BAML hedge fund monitor, hedge funds reduced exposure by 25 percent in the week ending on May 24. Further paring of long bets would not be unexpected—when markets gain consistently for some period, short term investors tend to take profits at the end of the perceived cycle. This was witnessed in the -7 percent decline in NIKKEI 225 (INDEXNIKKEI:NI225) that occurred in one day, spooking investors the world over.