According to Morgan Stanley’s July 28 Hedge Fund Positioning Update, hedge funds are getting bullish on equities outside the United States as Brexit fears subside and markets rally.

According to the prime brokerage report, which is based on aggregated information provided from filtered Morgan Stanley Prime Brokerage data, hedge funds have consistently brought equities throughout July even as the MSCI AC World has been mostly flat since July 14.

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Hedge funds turn bullish on European stocks

Morgan’s data shows that July has been the most net brought month since April 2015, and if you exclude March and April 2015, July has seen the most net buying by hedge funds for several years. Europe has dominated the buying in July, followed by EM Asia (particularly China and Korea) as equity markets in these regions have outperformed the S&P 500 since July 5.

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As a result of this bullish stance hedge fund sentiment, as measured by the global long/short ratio has climbed to year-to-date highs reversing most of the drop seen at the beginning of the year.

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Still, compared to long-term trends sentiment is still relatively bearish. According to the long-term long/short ratio, there’s going to have to be a further significant change in hedge fund net buying activity before sentiment hits levels that can be called “bullish.”

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Cumulative hedge fund net activity has been strongest in Europe over the past month, in fact, net July buying is so strong year-to-date hedge fund flows in the region are now nearly paired off.

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Nonetheless, since the beginning of January 2015 cumulative net activity as a percentage of each region’s average net exposure is negative for European equities,

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Similar to the buying of European equities, European hedge funds have been increasing leverage since early July, with both net and gross leverage levels climbing higher throughout the month.

However, leverage levels at European funds are still below pre-Brexit highs. Net leverage is currently at 36% (35th percentile since January 2010), and gross leverage is at 189% (72nd percentile since January 2010). Gross leverage at US-based hedge funds remained relatively flat during July although a median net leverage has decreased slightly as trading activity has been mixed over the month.

It looks as if hedge funds are starting to get bullish in some markets and according to Morgan’s data it also seems as if hedge funds are following the rest of the market by negating single stock names in favor of ETF’s.

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According to the prime brokerage information, ETF’s are the most net brought instrument by hedge funds by a wide margin followed more distantly by Staples and Tech. On the flip side, Cons Disc and Financials are most sold month-two-day. Other cyclical sectors like Energy, Industrials, and Materials are close to paired off.

European hedge funds, however, are moving into cyclicals with net buying being led by Tech (mostly Semis), Materials, Industrials, ETFs, and Cons Disc. Financials, Staples, and Energy are the most sold.