When it comes to hedge funds, the name makes it clear: they’re hedged against risks. However, it seems as if hedge funds in general might not be as hedged now as they used to be just a few years ago, according to analysts at Bank of America Merrill Lynch. They noted a number of data points which suggest that hedging, among hedge funds, has declined over the last three years.

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How hedge funds are impacted by the markets

Analysts Jue Xiong and Stephen Suttmeier released the latest edition of their weekly Hedge Fund Monitor report on Monday. They noted that hedge funds typically outperform less when the market declines, averaging a 2.5% outperformance of the S&P 500 since the beginning of 2005. Whenever the market rose during the same time frame, hedge funds averaged an underperformance of 1.94% relative to the index.

The BAML team suggests that hedge funds may have cut back on their hedging over the last three years as relative returns have declined and lower volatilities across strategies have been noted. Further, the analysts noted an increase in Sharpe ratios over the last three years whenever the markets have been down. Equity Long/ Short and Equity Market Neutral hedge funds had the highest three-year Sharpe ratio in down markets, according to Xiong and Suttmeier. (All graphs/ charts in this article are courtesy BAML.)

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Hedge funds go short on indexes

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Looking at moves across asset classes, last week large speculative hedge funds continued upping their short positions in the S&P 500 (from -$12.6 billion to -$8.2 billion notional) and Russell 2000 from (-$3.5 billion to $4.6 billion). They sold off the highest amount of Russell 2000 contracts in five years at $4.05 billion. They also cut their long position in the NASDAQ 100 from $6.4 billion to $4.8 billion.

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Large speculative funds cut their net longs in Soybean, reduced their longs in Corn and upped their shorts in Wheat. They also reduced their longs in Crude Oil and Heating Oil and raised their Natural Gas shorts and Gasoline long.

In currencies, they reduced their net short positions in the euro, the yen, the Australian dollar, and the pound, but they cut their shorts in the Mexican peso. In interest rates, they rotated toward shorter durations by upping their net longs in two-year and ten-year Treasuring and cut their long position in 30-year bonds. Large speculative funds were net long $22.2 billion worth of Treasuries, marking the highest level since April 2013.

Equity Market Neutral funds cut net long

Equity Market Neutral funds saw their net long position fall from 17% to 11%, which was still higher than the average of 50% Long/ 50% Short. They favored growth, large cap and high quality stocks and in fact went from neutral to positive on large cap and high quality stocks.

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Long/ Short remains in benchmark

Long/ Short hedge funds were at 39% net long last week, remaining within the benchmark range of between 35% and 40%, but significantly dropping off from the previous week's 53% net long position according to BAML. They were neutral on style and size but favored high quality stocks.

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Macro hedge funds cut index longs

The firm's analysts also found that Macro funds reduced their long positions in the S&P 500, the NASDAQ 100 and ten-year Treasuries. They increased their longs in the U.S. dollar and added to their shorts in Commodities.

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BAML also found that Macro hedge funds were the shortest in Emerging Markets that they have been since October 2014. They also started covering their MSCI EAFE shorts.

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Asian hedge funds take a hit in July

Unsurprisingly, Asian hedge funds were hard-hit in July as AsiaHedge recorded a 4.01% loss for the month excluding Japan. Europe was the best-performing region. U.S. Merger Arbitrage and CTA Advisors have been the best performers so far this month through Aug. 22, with the former climbing 0.28% and the latter declining 0.24%.

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