The percentage of the stock market now owned by hedge funds (5%) is the highest since Q2 2008,...

The percentage of the stock market now owned by hedge funds (5%) is the highest since Q2 2008, BofA Merrill Lynch finds in its Hedge Fund Quarterly Report. Hedge funds reduced cash holdings to the Q2 2007 trough of 4.3%, and raised net equity exposure to the Q2 2007 peak of 59%. Their largest exposure is to consumer discretionary stocks (XLY) followed by IT (XLK) and financials (XLF).
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Comments (23)
  • 153972
    , contributor
    Comments (1268) | Send Message
    I think we are at a fulcrum in the market that very few positive upside trends are present; for example, hedge funds are nearly all in, margins are at 21st century highs, the Fed is all in, S&P is at 19, etc.


    I'd be interested in hearing a contrary opinion.
    8 Jun 2013, 05:08 PM Reply Like
  • CanadaPhil
    , contributor
    Comments (85) | Send Message
    I agree with you that a lot of what was worth buying has been bought, and particularly regarding discretionary stocks and financials. While I feel it's harder to find bargains than a few months ago, this possible peak does not apply to all sectors and countries. If you believe that the economy will slowly be back on track, then you may be interested in industrial commodities (iron, coal...) which are now very low. If you believe that the economy still needs state banks to print money for a while, then you may be interested in precious metals (gold, silver...) which are also quite low. Thus, there are areas with interesting upside potential but they're quite risky.
    8 Jun 2013, 05:23 PM Reply Like
  • The Geoffster
    , contributor
    Comments (4296) | Send Message
    Agreed. I have positions in both your suggestions; ironically, as a hedge.
    8 Jun 2013, 06:08 PM Reply Like
  • change is the only constant
    , contributor
    Comments (2245) | Send Message
    I (think) I disagree, but it depends if you used the word fulcrum but meant inflection point.


    I believe its an inflection point. The question is sustainability versus collapse or decay. Hedge funds are usually super focused (and often use leverage) and focus on quantifiable begin's and end's versus themes. To contrast, most investors focus on themes and the ability to continue organically.


    If hedge funds believe a specific short (or long) represents an inevitability; then if correct, their interpretation is not a function of counter-party but external market risk. And that means staying power in a position. Think Tesla.


    Hedge funds having liquidity (if the FED is also all in) means they profit as the market of investors give up (or in the hedge funds opinion...come to their senses) and price moves in their favor..


    This inflection point means the shorts (and the longs) will not run out of money until the believers (or disbelievers) stop providing liquidity.


    The market has always worked this way, and its usually liquidity that makes the And winners are usually a function of how committed the believers (or disbelievers), and who gives up first.


    If the system is sustainable, but different individual parts in the system will: continue, collapse, or decay then Its not a fulcrum. Its proving (and betting on) who is right and who is wrong. And the FED being all in (to defend an over-extended government) is why its different (and an inflection point) this time.


    But if the government collapses, (and you meant the word fulcrum) you are right. It's a fulcrum. And those betting on the government to collapse are right as the liquidity provided is insufficient (or worth-less) to achieve sustainable growth.


    I do not believe, however, its a fulcrum, And that's my contrary opinion.
    8 Jun 2013, 06:41 PM Reply Like
  • Bioalchemy
    , contributor
    Comments (175) | Send Message
    I agree. At least even in the short term it is still unclear what consequence exiting QE will bring. Moreover, hedge funds are all in is absolutely a bearish signal, it basically means they are ready to dump them (slowly or quickly), or what else are you expecting them to do next?
    8 Jun 2013, 10:45 PM Reply Like
  • CanadaPhil
    , contributor
    Comments (85) | Send Message
    yliu54: let's assume like you say that hedge funds will dump what they've got. What would they do next? They'd go all in cash or bonds? Likely not. Even if hedge funds were to dump their holdings, a good chunk of that would have to go back in other stocks. That would just be a rotation. That is, assuming the most bearish hypothesis, all that means to me is that one might want to look at which sectors are under-valued; which is something we should already be doing anyway. Thus, I don't see how it would change one's current investment strategy.
    8 Jun 2013, 10:57 PM Reply Like
  • jumpnjoey77
    , contributor
    Comments (1207) | Send Message
    Go short, buy puts.
    9 Jun 2013, 03:47 AM Reply Like
  • mekats
    , contributor
    Comments (118) | Send Message
    The evidence for such a conclusion isn't overly compelling. 5% (or $750 bns of equities) isn't terribly informative. I don't believe hedge funds net long position is at any extremely bullish level. Margins are at record high but the case for regressing 2%-3% points isn't compelling with such firm control of costs and capex. And the SPX is not selling at 19x forward EPS but perhaps 15x. Running for the exits and soaking up money market returns or bond yields is nothing to salivate over. So the above observations are likely to be equally valid a year from now.
    8 Jun 2013, 05:35 PM Reply Like
  • Lares Capital
    , contributor
    Comments (438) | Send Message
    How ironic, XLY is my biggest short. Q2 2008 and Q2 2007 were sorry times to throw chips in the pot.
    8 Jun 2013, 05:49 PM Reply Like
  • Teutonic Knight
    , contributor
    Comments (3629) | Send Message
    Yup, All IN
    8 Jun 2013, 05:58 PM Reply Like
  • Kyle Spencer
    , contributor
    Comments (1240) | Send Message
    And as we continue to climb the Wall of Worry...
    8 Jun 2013, 06:04 PM Reply Like
  • Value-Piper
    , contributor
    Comments (5) | Send Message
    So in simple word, what does it mean?
    Does it mean, there would not be more buyer in the market and it would lead the market down?
    8 Jun 2013, 07:36 PM Reply Like
  • Be Here Now
    , contributor
    Comments (6266) | Send Message
    Does it mean that everyone who is a potential buyer has bought, and there are no more buyers left to support prices? Somehow I do not think so, the markets are much broader and deeper than they were in 1961 when this did happen (that's as far back as my awareness of the market goes).


    The hedge fund statistic bothers me. These guys were big contributors to the climactic selloff of March 2009 when they were hit with margin calls. Then we have been hearing about how Paulson and other hedge funds have been losing big bucks with bets gone bad for the past year. Are they right this time after having been consistently wrong in the recent past?
    8 Jun 2013, 08:03 PM Reply Like
  • Sean Bellamy McNulty
    , contributor
    Comments (235) | Send Message
    Other than his gold fund, Paulson's funds have been doing quite well.

    8 Jun 2013, 11:06 PM Reply Like
  • 8747S1115R
    , contributor
    Comments (275) | Send Message
    This means nothing. Lets talk about dividend payout ratios and how they are still well below 2007-08 levels. The "dividend floor" will keep this market roaring higher for at least the next three years as companies raise their dividends and the floor of the market. Hedge Funds have to be "all in" because if they aren't they are going to be left in the dust. There aren't any alternatives to get a return on your money. Stocks are where its at for the foreseeable future. If interest rates rise that means the economy is picking up steam and earnings will accelerate faster than expected most likely driving the market higher and if we don't get a rise in rates for a long period of time then everyone knows the fed will do whatever possible to keep prices "stabilized". I am twenty-five years old and buying stocks hand over fist. Looking forward to the future.
    8 Jun 2013, 09:00 PM Reply Like
  • hahaha48
    , contributor
    Comments (1411) | Send Message
    not if interest rate jump a lot higher
    9 Jun 2013, 12:26 AM Reply Like
  • Interesting Times
    , contributor
    Comments (15150) | Send Message
    Hedge funds all in. Time to get out !!
    8 Jun 2013, 09:51 PM Reply Like
  • Krustyman
    , contributor
    Comments (958) | Send Message
    What is always interesting is the timing of such news. Why the big boys want to remind us that the hedge funds raised net equity exposure to the Q2 2007 peak of 59%?


    They want to be sure people remembers the last crash. They want to scare you and keep you out of the market.


    Don't worry, BofA Merrill will not share anything with you before the next crash. They will turn short and say nothing.


    8 Jun 2013, 09:57 PM Reply Like
  • Ron Myers
    , contributor
    Comments (255) | Send Message
    These funds could easily be shorting futures at the same time. Basically the trade is that dividend stocks are overvalued especially if we see rising rates. The financials will benefit in that situation as well.
    8 Jun 2013, 11:12 PM Reply Like
  • hahaha48
    , contributor
    Comments (1411) | Send Message
    you have to understand how hedge fund make money. they take 20% of all profits and none of the lost.
    So they love to gamble because they lost they just shut down the fund and start a new one. In the worst case they start a new company and a new fund
    9 Jun 2013, 12:24 AM Reply Like
  • winningtrader
    , contributor
    Comments (2459) | Send Message
    HF invested like that is a bad sign. This is just hot money ready to get out if there is any trouble.
    9 Jun 2013, 06:50 AM Reply Like
  • rabdoes
    , contributor
    Comments (37) | Send Message
    I worry about the ETF structure of things. The hedgies are using these baskets, but whose holding the eggs? I can't put the pieces together, but I'm thinking this will be the next 'synthetic' catalyst to cataclism.
    9 Jun 2013, 08:26 AM Reply Like
  • Whitehawk
    , contributor
    Comments (3121) | Send Message
    Those who like to look at history might want to peruse the chart of the XLF, c. 2003-4. 1-2 month surge that never looked back, shooting up to lofty highs. If this market is going up, financials will lead it. Take advantage of that and don't get too cute!
    9 Jun 2013, 07:56 PM Reply Like
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