Technically speaking: hedge funds increase their exposure

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the “Fear of missing out” infected retail and hedge funds as they increase exposure to chase performance.

We have already mentioned the proximity “mania” retail investors taking exceptional risks in a variety of ways. From increasing leverage, to trading speculative options and taking out personal loans to invest; all of this is evidence of overconfident investors.

Investor Exuberance Allocation

However, this “risk appetite” is not relegated to retail investors alone. Professional managers, institutions and hedge funds are “all in” as well as.

The money flows are huge

Proof of “Professional investor” exuberance is the massive influx of capital. The first half of 2021 has passed every year since the lows of the financial crisis.

Annual flows of equity funds

Annual flows of equity funds

This influx of influx came from a rotation of foreign investors. Entries are based on expectations of more robust economic growth in the United States relative to its home country. The performance gap between “Rest of the world” and the United States represents the hunt for performance.

Relative performance of US equities vs ROW
Relative performance of US equities vs ROW

One of the problems is the extreme conditions of overbought and deviation in the US market. Such conditions, coupled with a deterioration in stock participation, remain of concern. (Bottom panel)

SPY Weekly Chart

Mental training

Nonetheless, given the $ 120 billion per month in “Quantitative softening” by the Federal Reserve, it is not surprising to see “Performance hunt” in action. As noted in , it all comes down to “psychology” of QE:

“The key to navigating quantitative easing!” and the Fed’s policy in general is to recognize that their effect on the stock market relies almost entirely on the speculative psychology of investors. You see, as long as investors are inclined to speculate, they treat zero rate money as a lower asset, and they will chase any asset with a return greater than zero (or a history of positive returns). The valuation doesn’t matter because investors psychologically rule out the possibility of a price drop in the first place. “ – John Hussman

In other words, “Quantitative softening” is mental training. Therefore, the only thing that impairs the effectiveness of the Fed’s monetary policy is the investor psychology itself.

This is what we argued in the “Paradox of stability / instability”.

“With the entire financial ecosystem now more heavily indebted than ever, due to the Fed’s stupendous moves to cut interest rates and flood the system with excessive levels of liquidity, “Instability of stability” is now the biggest risk. “

Since professional managers are subject to “Pursuit performance”.

Hedge funds are there

Hedge fund managers are now extremely long “risk” exposure.

Evercore ISI Hedge Fund survey - Equities
Evercore ISI Hedge Fund survey – Equities

As stated, that “Career risk” has professional managers who seek performance after having had a difficult start to the year. The need to catch up or risk losing assets to better performing managers increases with the market. Speak The Wall Street Journal:

“Notes from clients of Morgan Stanley (NYSE 🙂 and Goldman Sachs (NYSE 🙂 Fundamental show stock selection manager had negative alpha in the first half of the year.

Part of the challenge for professional stock pickers is that the markets are highly rotational. This year, the markets have wavered between growth stocks and value stocks. This makes it difficult for managers to find winning trades.

Sentiment Trader had excellent data at this point:

“The latest estimate of hedge fund exposure shows that the funds are made up of long equities close to 40% net, a rapid increase from their near stagnation a month ago. In recent years, after such large increases in allowances, it has given new gains.

Exposure to hedge funds

After any day since 2003 when the exposure was less than zero, the S&P 500 posted an annualized return of 15.2%, compared to just 1.4% when the exposure was greater than 25% as it was. is currently the case. If we look at the period after the first reading above 35%, the medium term returns were unimpressive.Merchant of feelings

S&P 500 after exposure to hedge funds
S&P 500 after exposure to hedge funds

The point is, when professional investors get “Sucked” in the search for performance, it deserves to be more “risk” aware.

As Bob Farrell once said:

“Investors tend to buy the most at the top and the least at the bottom. “

Smart money versus stupid money

None of this should come as a surprise. After more than a decade of monetary interventions, the psychology of QE is now firmly established. The problem is ultimately that with investors who are very “long” the market, there will be little “Buyers” when the time comes to sell.

Smart Vs Dumb Money 3 Month Average
Smart Vs Dumb Money 3 Month Average

The graph below combines the investor positioning of private and professional investors. While there is room for investors to be even more exposed to “risk,” these levels historically did not last long or ended well.

Index of greed / fear of the market

As discussed in virtually all fundamental analysis measures suggest that the markets are expensive.

“10-year forward yields are historically less than zero when the price / sell ratio is 2x. There has never been a previous period with a ratio reaching close to 3x. “

Correlation of the price / sales ratio
Correlation of the price / sales ratio

However, in the short term, investors are trapped by the “Afraid of missing something”. While it makes sense to move away from an overvalued, exuberant and tense market, there is a consequence to “missing.” While a bear market does destroy capital, not participating in a bull market has an equal impact on the bottom line.

It is a terrible choice.

Conclusion

A correction is coming. I have no idea when or why.

However, the markets are currently in a very long lead with no correction of 5% or more. So when that happens, for whatever reason, it “Feel” worse than it is. This is due to the high level of complacency that investors have developed in this market.

Days without 5% correction
Days without 5% correction

While we only expect a correction in the short term, you cannot rule out a “Real bear market” Is.

It might not be today, next month, or even next year. But there is one truth in a deal with

“Bull markets are built on optimism and are dying of exuberance.”

All bull markets eventually die. You never know the cause in advance. Ignoring the story won’t make the damage less catastrophic.

Historically, we find that when valuations and prices have expanded well beyond their intrinsic long-term trend lines, subsequent reversals BEYOND those trend lines have ensued.

Everytime.

Importantly, these flashbacks erased a decade or more of investor gains. Think about it. If the next correction begins in 2022 and ONLY returns to the long-term trendline, investors will reset portfolios to levels not seen since 2008.

A decade of gains will be wiped out.

This tends to have a very negative impact on an individual’s retirement plans.

If you think it can’t happen, talk to anyone who was thinking about retiring in 2000 or 2008. I’m sure they have an interesting story to share with you.


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