Hedge Funds Fully Invested, Cash Holdings Near 2007 Low: BAML

Hedge Funds Fully Invested, Cash Holdings Near 2007 Low: BAML

hedge funds fully invested cash levels drop close to record low

Hedge funds net dollar exposure sets new high in 4Q12. Based on the quarterly 13F filings and estimated short positions of the equity holdings of 895 funds, BAML calculates that hedge funds raised net exposure by about 10% to $418bn notional in 4Q12, a new high since 2005.

Percentage-wise, net exposure rose to 55% from 51%, a little below the 2007 peak of 59%. Gross exposure is unchanged at roughly 150%. BAML estimates cash holdings fell to 4.6% from 5.0% just shy of the historic low of 4.3% in 2Q 2007. BAML considers the 4.6% cash level “fully invested.” Gross exposure rose by 1.8% to $1150bn notional in 4Q12. Percentage-wise, gross exposure stayed at about 150%. Additionally, BAML recently noted hedge fund leverage was approaching levels not seen since 2007.

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The data comes from a new report writen by Technical research analyst, Mary Ann Bartels.

In BAML’s latest weekly hedge fund monitor market neutral hedge funds aggressively bought market exposure to 9% net long from 1% net long. Equity Long/Short bought market exposure to 35% net long from 33% net long, within the 35-40% benchmark.

Other key finds for 4Q12…..


Gold & UST out, Transports, Italy, Mexico & Japan in ETF ownership shifts from Inflation protection Treasuries (NYSE:TIP) and short-term Treasuries (SHY) to aggressively to Transports (NYSE:IYT) Italy (NYSE:EWI), Mexico (NYSE:EWW) and some Japan (NYSE:EWJ). In addition, hedge funds continue to sell precious metals (GLD, GDX, GDXJ and PPLT).

After adjusting for short biased ETFs, hedge funds were net short $48.2bn worth of ETFs in 4Q12, which would reduce BAML’s hedge fund net exposure estimate to 48.7% and increase gross exposure estimate to 170%.

SMIDs weight rose by 0.6% to 21.5% of portfolio

Hedge funds increased ownership as a percentage of float across market caps and own a larger share of the market. Hedge funds raised the weight of small cap to 6.6% of portfolio from 6.2%, and raised mid cap to 14.9% from 14.7%. Large caps still dominate the portfolio with a weight of 78.5%.

Cyclicals up 50-fold from 09 low; REITs aggressively bought

Hedge funds bought dollar exposure of the cyclical sectors by 12.2% to a record high of $347bn in the last quarter of 2012, an increase of 50 folds from the 1Q 2009 low of $6.8bn. Cyclical sectors accounted for 83% of hedge fund aggregate net exposure by the end of 4Q12, also a record high.

Hedge funds increased weight in six out of 10 sectors, led by Financials, by 2.7%. REITs were aggressively bought during 4Q’12. Financials accounted for 18.1% of portfolios by the end of 2012 – the highest since BAML started recording the data in 2005.

Hedge Fund Generals outperformed in 4Q12

The Hedge Fund Generals index was up 0.51% in 4Q12, compared to down 1.01% for the S&P 500 (S&P Indices:.INX). For 2013, the hedge fund Generals was up 14.19% as of February 28, compared to a price return of 6.20% for the S&P 500 (S&P Indices:.INX). The strategy outperformed the S&P 500 index by 69bp per month and 209bp per quarter between September 2003 and December 2012.

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