Investors are taking money off the table ahead of the US presidential election according to JP Morgan’s most recent Flows & Liquidity report.
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According to the report, which uses data from multiple asset classes tapering fears combined with the US election, have been inducing investors to cut risk in recent weeks. The de-risking mirrors the same kind of movements seen before the Brexit referendum, although this time around there is one significant difference in that the threat of tapering by the Federal Reserve is creating even broader de-risking across investor types. JP Morgan’s analysis shows that during Brexit CTAs were the main de-riskers. This time around, all investor types are lightening up on equities.
Hedge funds are taking money off the table
Specifically, Discretionary Macro HFs and Multi Asset (or Balanced) Mutual Funds have seen their 21 day rolling betas drop from a yearly high of 0.5 to near 0.0 (based on a bivariate regression of their returns to the returns of S&P500 and Barcap US Agg indices). These figures imply that not only have Discretionary Macro hedge funds, a $300 billion universe cut their exposure over the past month, but the equity beta suggests that they are currently neutral on equities. Additionally, multi-asset mutual funds — a $1.2 trillion universe in the United States — have been reducing their exposure in recent months. Their current equity beta is close to the middle of its historical range. Equity Long Short hedge funds — a $800 billion universe — cut their equity beta over the past month to the low end of its historical range. CTAs have been de-risking since the September 8th ECB taper tantrum episode lowering their equity beta to only 0.2 currently vs. close to 1.0 at the beginning of September. Lastly, Risk Parity funds have modestly captive their equity exposure over the past two months. The current equity beta of risk parity funds is close to 0.5, which is rather elevated by historical standards.
Another extremely interesting takeaway from JP Morgan’s flows report is the bank’s analysis of funds’ performance on October 7 when the British pound fell by as much as 6% in Asian trading. According to JP Morgan’s analysis of the figures, only Discretionary Macro Hedge Funds managed to make money on the day. Neither CTAs nor currency hedge funds appear to have benefited from sterling’s sharp drop. It would appear that both these fund classes either had a large short position on sterling, but lost money in other positions offsetting the gain from the sterling short or the liquidity disruption of that day forced position liquidation.