The stock market bounce off the October lows was a short covering rally that later transformed into being driven by a return of the corporate buyback bids and large inflows, says a Deutsche Bank prime brokerage report on November hedge fund trends.

Hedge Funds’ positions in dollar delivered and hurt in oil

“Evidence from earnings season so far points to buyback activity picking up strongly during third quarter and continuing in the fourth quarter,” they said in the report. “Overall fund positioning remains neutral in equities and rates while long positions in the dollar delivered and hurt in oil and commodities.”

Hedge Funds

Looking at hedge funds performance broadly, the report’s performance dispersion graphic provides interesting insight. The widest spread among all hedge fund categories in the month could be seen in equity long / short strategies.  At an average of -0.91 percent on the month, the strategy most interestingly had a tremendous range of negative performance, falling near 5 percent at the tail of its returns distribution.  One might assume that a long / short equity fund might be positioned to handle down markets, but in reality many long / short strategies are designed to heavily favor long positioning.

Hedge Funds

Hedge Funds

Credit hedge funds remain on top of Deutsche Bank’s list

The worst performing sector in Deutsche Bank’s analysis was credit, down -1.34 percent on the month but the top sector was fixed income, up 0.90 percent on the month. While credit was down on the month, it remains atop Deutsche Bank’s top performing hedge funds of the year, up 6.04 percent.

Hedge Funds

The report noted that overall equity fund positioning remains close to neutral while mutual funds performed in line with the market through the rally. These funds appear to have repositioned their exposure to overweight on cyclical sectors except financials, a very underweight sector. After being underweight energy through most of the summer they have now turned overweight in light of the significant sell-off. Long-short funds remain overweight while they reduced exposure to small caps to a neutral level. Macro funds have been exposed not to stock, but to the dollar. Mutual funds appear underweight Europe and the emerging markets while they are overweight Latin America while neutral on Asia and Japan.

Hedge Funds

Option market indicators like S&P 500 skew, single stock correlations and the put/call ratio have also all receded from extreme highs, the report noted, pointing to a reversion to a “normal” market environment.

Hedge Funds

Hedge Funds