Are Hedge Funds Missing the Rally?

The more I read this story, it all sounded vaguely familiar:

• The fast money is proving slow to jump on the market's bandwagon. Hedge funds, decried by many as quick traders, have played catch-up during the market rally since March. The average fund was 45% "net long" as of May 19, or had investment holdings valued at 45% more than its bearish "short" positions, according to Hedge Fund Research. That figure is up from 33% earlier this year, but still is far below its 55% level a year ago. Funds are less bullish now than they were just before the market crumbled last fall.
• Hedge-fund managers, and their investors, said many remain in a neutral position. Many funds are skeptical the economy has entered a new period of growth that justifies high equity multiples. Others fear dislocations from governments shoveling money at problems.
• Hedge funds tend to underperform stock-market averages at inflection points, in part because they aim to create a "hedged" performance, rather than ape the market. (uhh, that was DISPROVED last year - many were simply leveraged up the gills betting on 1 side of the market.. and paid the price)
• While a stock surge might force a mutual-fund manager to jump in because he is judged against the index, the pressure on hedge funds is less. (but not if "the market" puts on another 20% from here) If stocks keep surging, hedgies might have to jump in with two feet, giving the market another lift. (I can agree with that, you can only sit so long if "the market" continues in one direction - and just about the time every last skeptic has thrown in the towel, we'll reverse. Or at least we used to before the Invisible Hand drove the market up 1%+ in a flurry of futures buying on Friday afternoons. Or jumped futures to a positive skew almost every morning between 7 AM and 9 AM). But their continued hesitancy should be a sign of caution for investors.
• Some noted stock pickers remain wary. Steve Mandel's Lone Pine Capital bought long-dated, out-of-the-money call positions representing 2.6 million shares of a gold exchange-traded fund in the first quarter, while Och-Ziff Capital Management Group and Atticus Capital have been cautious on the market.

I'm not sure buying a long-dated out of the money call position in gold is necessarily a negative call on the market. It is just a very bullish call on paper printing "prosperity".... i.e. inflation. If one believes the Fed can successfully inflate every asset under the moon, stocks will be no different - every asset of limited supply should be chased ever upward as an unlimited supply of newfound paper US pesos is thrown upon us. (p.s. there is now - from what I am reading - approaching $1 trillion of newfound money sitting on banks' balance sheets; when they finally decide to lend this out instead of hoard it... at their typical 7:1 ratio - it will be scary liquidity).

So S&P 1500 (i.e. prosperity) can go nicely with gold $1500. However bread $3, gas $4 are some of the ill effects. But we're all winners in nominal terms as most people will only focus on the wins not realizing the inflation adjusted returns. There are benefits of having sheeple who remain financially in the dark. Let's see if the master plan works. Can't wait for the next Hugh Hendry update as the horde has continued to work against him... [Apr 28: The Latest Hugh Hendry] the bulls are running away with inflation in the inflation v deflation debate.

Comments

[RiskReturnO...:]

With the increasing correlation among asset classes (post-Lehman), could it be possible that hedge funds can beat SPY performance by being long non-SPY assets that are highly correlated with the stocks in SPY?

For example, a fund manager can be long DBA, instead of MOO. When MOO goes up, it adds to SPY performance. With DBA, you get some participation as well, but not counted as "being long"?

Another big winner in Q2 so far is high yield and convertible bonds. These have returned 30%+ since March bottom, yet they are not in SPY, so maybe not considered in the "long position"?

Also, they could own DBB (base metals) and DBO (oil). They have been big winners, but they are not in SPY (as opposed to XLB and XLE). Would these be counted in the "long position"?

Finally, instead of being long QQQQ (or XLK in SPY), a fund manager can be long EWY (Korea) and EWT (Taiwan), as they have big tech exposure. Would these assets be counted the same way?

In summary, post-Lehman, being long the (US) market can be achieved in many ways, with positively correlated assets, and some that can deliver extra "alpha."

Jun 01 10:37 AM

[ralphie:]

thanks tradermark;

i usually do not comment but certainly appreciate the efforts of all who either post as you do or comment as others do

however, even though it is in the "trading" day, i just had to comment on one thing you have noted that few of the other posters ever comment on; the magical spike close like how a fairly dead week and lackluster friday instantly arose from the dead with the futures jump at precisely 3:46:41 with unerring derring do;

still trying to figure out if its ppt? or program trading? or what, but thanks for commenting on it because it is one heck of a trading mover

Jun 01 01:30 PM

[White Shield:]

Smart money sees the trap and takes a different path.

Jun 01 01:48 PM

[Jackson Cash:]

Bingo White Shield.

There is nothing left to trade that isn't a scam to fleece the taxpayer.

The hedgies' are doing what they should be doing -- building massive short positions in equity markets (why else doe one note the aforementioned PPT computer trading of GS) and long commodities.

Don't agree? Watch what happens the next three months.

Jun 03 11:16 AM

[jgbooker:]

Perhaps hedge managers see another dip coming, and will buy in at more attractive prices. That is how I would read things.

Jun 03 11:20 AM

[West Coast ...:]

Markets can stay irrational longer than you can remain solvent (Yoda on another comment). How true.

Jun 03 04:08 PM