Active manager positioning is quite bullish right now, but according to one firm, that doesn’t mean it is excessive, or at least, not yet anyway. In fact, short covering may have been fueling much of this year’s rally, and the expected tax cut and improving economic data still may not be fully priced in. The findings were also interesting because they revealed that hedge funds are going long on equities right now, while mutual funds and asset allocators aren’t.
Measuring active manager positioning
In a note on Tuesday, UBS strategist Keith Parker laid out their measurements of active manager positioning with a focus on mutual fund positions. To measure active manager positioning, his firm built a proprietary database which includes more than 930 mutual funds with about $5.4 trillion in assets under management. UBS also tracks "higher frequency hedge fund indices."
According to Parker, passive funds are attracting most of the money these days, but despite that, active mutual funds still hold 25% of the equity market. Asset allocation funds are becoming more and more important, as year-to-date inflows stand at approximately $50 billion. He added that more of the trading volumes comes from hedge funds, which means that their positioning "is key."
In measuring active manager positioning, Parker looked at every fund's daily returns and compared it to its stated benchmark. This gave them a rolling, one-month beta, which he believes is "a good proxy for risk exposure," and then they adjust for volatility and average equity exposure. They scored a variety of mutual funds and hedge funds and hedge fund indices to get a snapshot of active manager positioning.
Hedge funds are overweight, mutual funds are neutral
Parker summed up his findings on active manager positioning by describing hedge funds as overweight, mutual funds as neutral, and balanced funds as underweight.
He also describes macro/ CTA fund exposure as "very long," while he said that long-short equity hedge fund exposure has climbed "considerably" within the last month. He said that asset allocations are still underweight as far as positioning goes, but the severity of their underweight has lessened recently. U.S. equity mutual fund exposure is neutral as growth funds have de-risked "considerably" within the last month and value funds have increased their risk.
Parker also said that small cap funds are the most overweight, which makes sense due to the expectation of tax reform. The reforms are expected to benefit domestic firms the most because all their revenues are taxed at U.S. rates rather than just part of them.
Is it time to sell yet?
One of the biggest question marks investors have had this year is when the bull market will come to an end, and we may have a hint. Parker said in his study of active manager positioning that his composite beta measure has been a solid sell signal close to the tops within the last five years. He said this measure is still below the level he describes as "a stronger sell signal," although it has been rising over the last three months.