Canary In The Casino—–Hedge Funds Have Never Been Longer

If the central banks’ intention was to convert “hedge” funds into what are essentially plain vanilla long-onlies (understandable in a world in which being long the most  shorted names generates outsized returns year after year), they have succeeded.

According to the latest Bank of America hedge fund holdings analysis based on 13F filings and estimated short positions of the equity holdings of 952 funds, the banks estimates “hedge funds raised net exposure to a record high of $785bn notional at the beginning of Q2 2015, up 6.1% QoQ and more than double the pre-crisis peak of $373bn (Q2 2007).”

In other words, hedge funds have never been more net long: percentage-wise, net exposure climbed slightly to 77%, also a record high and surpassed the pre-crisis peak of 59% (Q2 2007). Net exposure fell to 70% after subtracting ETF shorts, compared to 69% in the previous quarter. Cash holdings remained at the record low level of 3.3%.

Hedge funds have also rarely been less short: in Q1 short exposure was 55%, 25% lower than the Q2 2007 reading of 74%. Which means that once the dam breaks and the selling begins, the amount of short covering, that traditional emergency break in every panic selling scramble, will barely make a dent.

Some more observations:

Hedge funds increased gross exposure to $1.9tn notional as of the beginning of Q2 2015, a 5.1% QoQ increase.  Percentage-wise, long exposure stood at 132%, slightly below the Q2 2007 reading of 133%. Short exposure was 55%, much lower than the Q2 2007 reading of 74% (Chart 3). When including ETF positions, gross exposure increases to 201%, compared to 200% last quarter.


And some index-specific observations: Hedge funds owned 5.84% of the Russell 3000 float shares as of the beginning of Q2 2015, a new record high after a brief setback in Q4 2015. Hedge funds increased ownership of large caps and small caps to a record high as a percentage of float shares, at the cost of mid-caps. Portfolio weight of large caps rose to 79.5% from 78.2% QoQ, below the Q2 2013 peak of 80.5%.