Bank of America Merrill Lynch just put out with an extensive report on hedge fund positions. In general, hedge funds seem to be bullish; they are buying SMID caps, financials, and housing, among other asset classes. The findings are very interesting and summarized below.e
Based on the quarterly 13F filings and estimated short positions of the equity holdings of 895 funds, BAML calculates that hedge funds cut net exposure by about 18% to $306bn notional in 2Q12, a reversal of the uptrend since 3Q11. Percentage-wise, net exposure fell from 54% to 45%. Gross exposure is little changed at roughly 150%. BAML estimates that cash holdings rose to 5.6% from 4.7%, still below the historical average of 8-10%.
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Vanguard REIT ETF (NYSE:VNQ) and iShares Dow Jones US Home Const. (ETF)
(NYSEARCA:ITB) entered the list of top 25 holdings. Gold, Yield and Emerging Markets remain major investment themes. Ownership of SPDR Gold Trust (ETF) (NYSEARCA:GLD rose sharply to 11.8% from 6.8% based on market cap. Details are listed on page. With homebuilding a new investment focus BAML also ran screens at the stock level – the stocks are still under-owned. HFs tilt toward SMID, large cap weight lowest since 2Q09.
Hedge funds tilted toward small and mid caps in 2Q12, increasing small and mid cap ownership to 6.9% and 7.1% of total floats, respectively. Meanwhile, hedge funds reduced large cap ownership to 3.3% of the market from 3.5%. Large caps
represented 78.5% of hedge fund portfolios in 2Q12, the lowest since 2Q09.
HFs favor Financials; Pharma net short for first time Although hedge funds sold dollar exposures across 10 sectors in 2Q12, they increased weight in Discretionary, Staples and Technology. Cyclical sectors accounted for 82% of hedge fund net exposure, a record high. Telecom and Utilities were sold the most aggressively, with dollar notional cut by 88.8% and
26.7%, respectively. Pharmaceuticals were sold to a net short for the first time since BAML’s records started in 2005. Financials replaced Healthcare as the third most favored sector; Materials replaced Staples as the third least favored.
The interest in Financials was concentrated in Insurance, Diversified Financials Services and Capital Markets. Within Insurance, hedge funds have the biggest positions in American International Group, Inc. (NYSE:AIG) and Aon PLC (NYSE:AON) on a US$ basis; JPMorgan Chase & Co. (NYSE:JPM), CME and Citigroup Inc. (NYSE:C) in Diversified
Financials; and State Street Corporation (NYSE:STT) and Invesco Ltd. (NYSE:IVZ) in Capital Markets.
Hedge funds sold Industrials by $9.2bn notional to 10.0% of their total portfolio. However, they bought exposure to Airlines and Electrical Equipment. Much of their focus is on Aerospace & Defense, followed by Road & Rail and Airlines. Industrials had been a favorite hedge fund sector prior to the recession, but they have been more cautious since the financial crisis. Within Aerospace & Defense, hedge funds have very large positions in General Dynamics Corporation (NYSE:GD), TransDigm Group Incorporated (NYSE:TDG) and Honeywell International Inc. (NYSE:HON); in Road & Rail they were largely concentrated in Dollar Thrifty Automotive Group, Inc. (NYSE:DTG) and Union Pacific Corporation(NYSE:UNP).
Hedge funds are most concentrated in three sectors – Technology, Consumer Discretionary and Health Care. Once again, a few prominent industries within these sectors are driving the asset flows.
Technology. Hedge funds heavily favor Internet Software & Services, Computers & Peripherals, and Software. Key stock positions on a US$ basis include QUALCOMM, Inc. (NASDAQ:QCOM), Motorola Solutions Inc (NYSE:MSI), Cisco Systems, Inc. (NASDAQ:CSCO), Loral Space & Communications Ltd. (NASDAQ:LORL) and ViaSat, Inc. (NASDAQ:VSAT).
Consumer Discretionary. Hedge funds favor Media and Retail. Key stock positions include Delphi Automotive PLC (NYSE:DLPH), Visteon Corporation (NYSE:VC), Federal-Mogul Corporation (NASDAQ:FDML), Lear Corporation (NYSE:LEA) and The Goodyear Tire & Rubber Company (NYSE:GT).
Health Care. Hedge fund sold Pharmaceuticals to a net short for the first time in BAML’s record which started in 1Q05. Their assets are concentrated in Health Care Providers, Biotech and Health Care Equipment. Key stock positions include Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX), Gilead Sciences, Inc. (NASDAQ:GILD), Medivation, Inc. (NASDAQ:MDVN), Biogen Idec Inc. (NASDAQ:BIIB) and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX).
Hedge Fund Generals led S&P 500 by 2.22% YTD
The Hedge Fund Generals is a cloning strategy that combines the most concentrated and popular stocks among hedge funds each quarter. The strategy led the S&P 500 by 222bp year-to-date as of June 30 2012, but underperformed by 175bp in 2Q12