Despite 12% Rally Hedge Funds Turn From Stocks
For the first time this year, hedge funds are turning away from a rally in the global stock market.
The ratio of bullish to bearish bets among professional speculators fell last week and is below historical averages, according to a survey by International Strategy & Investment Group. The reduction came as the MSCI All-Country World Index extended its yearly advance to 12 percent and contrasts with January, when managers bought shares as they rose, data compiled by ISI and Bloomberg show.
Hedge funds make up more of the equity market after their assets expanded and individuals pulled record cash from U.S. mutual funds. Bulls say gains will get bigger as managers who have trailed benchmark indexes most of the year start to buy. Bears say previous rallies were fueled as they tried to catch up and the advance that began in June will fizzle.
“The underexposure of hedge funds is one of the reasons I remain bullish on equities,” Michael Strauss, who helps oversee about $26 billion as chief investment strategist at Commonfund in Wilton, Connecticut, said in a phone interview. “It may create forced buying into the market.”
The ISI gauge of hedge-fund bullishness measuring the proportion of bets that shares will rise slipped to 46.5 last week from 48.1 in late August. The level is below the measure’s 10-year average of 50.2, the ISI data show.
Skepticism toward equities has limited returns in 2012. The Bloomberg Global Aggregate Hedge Fund Index rose 1 percent in August, compared with the MSCI All-Country’s 1.9 percent advance. It has twice trailed the global benchmark for three straight months in 2012, data compiled by Bloomberg show.
The increase in the MSCI index (BBHFUNDS) this year is the biggest rally in three years. Since the 2011 low of 272.08 on Oct. 4, the index climbed 23 percent to 335.56 as U.S. companies extended their string of earnings growth to 11 quarters and central banks announced unprecedented measures to stimulate economies. The equity measure peaked at 427.63 on Oct. 31, 2007.
“The level of net exposure suggests managers have not been chasing the recent rally,” Oscar Sloterbeck, senior managing director at New York-based ISI, said in an e-mail on Sept. 27.
ISI’s index, based on a survey of 35 hedge funds with about $84 billion under management, plots bullish and bearish equity bets on a scale of zero through 100. The lowest represents maximum short selling, while 100 is the maximum bullish. At 50, hedge funds are deploying a normal ratio of long to short investments, according to ISI.
Professional investors were late to the rally in October 2011 and at the start of this year. Net exposure to stocks reached 42 at the end of November, the lowest level since just before the bull market began three years ago. Managers went bearish amid slowing growth in the U.S. economy, Europe’s credit crisis and President Barack Obama’s impasse with Congress over raising the debt ceiling.
They were blindsided with an 11 percent gain in October 2011 as European leaders pledged a plan to support the region’s banks, U.S. retail sales exceeded economists’ estimates and third-quarter earnings beat analyst forecasts.
The hedge-fund industry sometimes acts as a group, which translates into sudden swings in the level of bullishness, said Uri Landesman at New York-based hedge fund Platinum Partners. His firm ranked in the top 10 among mid-size hedge funds based on returns for the 10 months ended Oct. 31, 2011, according to data compiled by Bloomberg.
“It means big moves either way,” Landesman, who manages $1.15 billion as president of Platinum Partners, said in a phone interview. “A few thought-leaders start and copy-cat funds pile on. For most people to go against the trend, it’s nice to have some smart money behind them, so they can tell their client or boss that so-and-so is doing it.”
Hedge funds bought equities following the advance in October 2011 and the 5.7 percent increase in January. ISI’s index of net exposure to stocks rose to a high of 48.9 at the end of March from the November low after global equities rose for a third month.
The underperformance hasn’t kept clients from sending money to the largely unregulated investment firms that aim to make money whether markets rise or fall. Unused cash from hedge funds could fuel more gains, said Jack Ablin at BMO Private Bank.
About $20 billion was deposited in the six months ended June 30, according to Chicago-based Hedge Fund Research Inc. That compares with withdrawals from mutual funds that buy U.S. stocks of more than $90 billion this year, according to the Investment Company Institute in Washington. U.S. managers saw outflows for a fifth year in 2011, the longest streak in data going back to 1984.
“There’s latent buying power in hedge funds which could help push the rally,” Ablin, who helps oversee about $65 billion as chief investment officer at BMO Private Bank in Chicago, said in a phone interview. “I track liquidity looking for where the next dry powder is going to come from and I’m not seeing much in the traditional places.”
Investors expecting stocks to appreciate at the end of the year will be disappointed, according to Jeffrey Sica of SICA Wealth Management. Hedge funds won’t chase returns or accept more risk as the stock market becomes vulnerable to political turmoil in the U.S. where the so-called fiscal cliff looms and as Europe’s debt crisis worsens.
“A lot of hedge funds don’t want to put themselves in a position where they overexpose themselves in a volatile environment,” Sica, the Morristown, New Jersey-based president of SICA Wealth Management who helps oversee more than $1 billion, said in a phone interview. “Hedge funds have become ready to accept their underperformance as a consequence of their concerns.”
The fiscal cliff refers to the $600 billion of tax increases and spending cuts that will kick in automatically in 2013 unless Congress fails to break a partisan deadlock and reach agreement on the nation’s budget deficit. The MSCI All- Country slipped 1.8 percent last week as European leaders clashed on ways to stem the debt crisis.
While money managers have been wary of entering the market this year, they’ll be driven to add equities during the last three months to avoid client redemptions, according to Robert Pavlik of Banyan Partners LLC in New York.
“What the market needs and what the market will probably see is hedge funds largely being forced in,” Pavlik, who helps manage about $1.4 billion as chief market strategist, said yesterday in a phone interview. “They’ll be forced to buy stocks and give up on their concerns to paint their portfolios. Otherwise, they’ll be facing year-end returns that are underperforming.”
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