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Given all the global economic headwinds (e.g., high U.S. unemployment, end of QE2, Eurozone instability, slowing growth in China, U.S. debt ceiling debate), it's no wonder why some prominent fund managers have increased their cash positions.

According to a recent Bank of America, survey, 18 percent of asset allocators (including hedge funds) are overweight cash, the highest level in a year and up from 6 percent in May.

Hedge Funds Raising Cash and Trading Less

Moore Capital Management and George Soros' Quantum Endowment Fund are among hedge funds that have reduced the amount of money they’re investing in stock, bond and currency markets as they look for clarity on global events.

As reported by Bloomberg, Soros is perplexed:

“I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis,” Soros, 80, said in April at a conference at Bretton Woods organized by his Institute for New Economic Thinking. “The markets are inherently unstable. There is no immediate collapse, nor no immediate solution.

According to data compiled by Bloomberg, t he aversion to risk is reflected in trading volumes. Trading in the 50 companies in Goldman Sachs Group Inc.’s index of stocks most commonly owned by hedge funds fell to 4.11 billion shares in June, the lowest monthly level since August 2008.

Bond Fund Managers Also Boosting Cash

Bloomberg also reports that m utual funds in the U.S. that focus on bonds have the highest percentage of their assets in cash since 2008, which may temper a rise in yields from about record lows as managers put that money to work.

Few managers see scope for yields on everything from Treasuries to junk bonds to fall, and many said they are poised to redeploy the cash into bonds as they rise because the economy isn’t strong enough to generate faster inflation or cause the Federal Reserve to raise interest rates this year. Each time the yield on the benchmark 10-year Treasury approached 4 percent in the past three years, investors drove it lower. It ended at 2.91 percent last week.

Bill Gross' Total Return Fund had approximately 29% of its assets invested in cash and equivalents as of June 30, equivalent to about $70 billion.

Jeffrey Gundlach has also boosted cash as he believes bond prices are heading lower:

“We are looking for a more severe down move in prices, for a better level to buy,” said Jeffrey Gundlach, whose $8.51 billion DoubleLine Total Return Bond Fund beat 99 percent of its peers in the last year by returning 13 percent, according to data compiled by Bloomberg. “To hold cash you have to have a conviction that prices of something that you’d otherwise own will go down, which is exactly what happened in June.”

We continue to believe that investors should remain cautious in the current market environment and should focus on investments that will hold up well in a stagnant economy (defensive dividend stocks and mortgage REITs).

We have also boosted our cash position recently. However, our top 5 holdings are unchanged: Abbott Laboratories (NYSE:ABT), Altria Group (NYSE:MO), Annaly Capital (NYSE:NLY), Kinder Morgan Energy Partners (NYSE:KMP), MFA Financial (NYSE:MFA).

Disclosure: I am long MO, NLY, ABT, KMP, MFA.

Source: Why Prominent Fund Managers Are Raising Cash