Spooked by Volatility, Hedge Funds Pare Back Long Bets

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Hedge funds were upping their leverage as the stock market was on an unprecedented uptrend over the past few months ( CULLEN ROCHE of PragCap has some amazing stats on what he terms ‘the Can’t Lose Market’). However, with the recent (slight) volatility, hedge funds got spooked and decreased exposure. So says the latest hedge fund monitor from BAML. Below is a summary of notable stats on the recent ‘flight to safety’.

hedge funds exposure


S&P 500 Large spec positions

Large speculators reduced their long S&P 500 positioning by ~25%; from $18.0bn to $13.5bn. However, positioning remains in a crowded long. Following the bearish reversal last week, the S&P500 risks further corrective downside in the week ahead for a test of 1600-1580 area support.

NASDAQ 100 Large spec positions

Large speculators maintained their net long positions in the NASDAQ 100 index at $8.2bn notional.

Russell 2000 Large spec positions

Large speculators increased their net long Russell 2000 position to $2.7bn notional. Readings are neutral. Data extends back to 1994.

Estimated factor exposures for Long/Short Equity hedge funds

Long/Short exposure is ~32% net long, below the 35-40% benchmark.

Long/Short hedge funds hold positive inflationary expectations; are neutral on quality preferences; and prefer growth & small caps. Significant factor exposure changes since last week
Long/Short reduced market exposure to 32% from 41% net long.
Switched to positive inflationary expectations & growth preferences from neutral; tilted further towards small caps and unwound their low quality tilt.

The investable hedge fund composite index was up 1.45% month-to-date as of May 22, compared to a price return of 3.62% for the S&P 500 index.

Convertible Arbitrage and Event Driven performed the best, up 2.80% and 2.13%, respectively. Market Neutral performed the worst and was down 0.67%.

Examining Hedge Fund positioning by major strategies

BAML models indicate that Market Neutral hedge  funds aggressively reduced market exposure to 6% from 16% net long. Equity Long/Short funds reduced market exposure to 32% from 41% net long; below the 35-40% benchmark level. Macros funds partially covered their shorts in the S&P 500, NASDAQ 100, commodities and T-notes, reduced their net long positions in EM and EAFE, while maintaining a large cap bias. Additionally they sold US Dollar Index to a net short for the first time since March 2013.

Significant Hedge fund moves across asset classes based on CFTC data

Equities. Large specs sold the S&P 500, bought Russell 2000, and were flat in the NASDAQ 100. The NASDAQ 100 and S&P 500 remain crowded longs.

Agriculture. Large specs bought soybeans, sold corn, and increased their wheat shorts to levels not seen since May’12. Wheat moved into a crowded short zone.

Metals. Large specs sold gold, silver & platinum, slightly bought palladium and partially covered copper shorts. Gold and Silver remain in the buy zone.

Energy. Large specs bought crude oil & gasoline, but added to their shorts in heating oil & natural gas. Crude moved into a crowded long; heating oil remains in a crowded short.

FX. Large specs increased their Euro & Yen shorts while adding to their US Dollar Index longs. Euro moved into a crowded short for the 1st time since last Nov.

See Shorts In AUD Reach New Highs, Hedge Funds ‘Join’ Soros

Interest Rates. Large specs sold 30yr & 2yr Treasuries, yet bought 10yr Treasuries. Readings are neutral.

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