Are you ready?
Secret: Hedge fund smart money is just as dumb as your smart money. Or is it the other way around? I am not exactly sure, but according to the WSJ report below most hedge funds have been caught in the recent sell off, just as everybody else. This should not come as surprise to the industry insiders. At the end of the day 99% of market participants tend to operate in the same fashion (the other 1% make all the money). Including the hedgies. Here is how.
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WSJ Reports: Hedge Funds Scramble As Stocks Tumble
For hedge funds, it’s been a race to the exits in the stock market.
Hedge funds have been cutting their overall exposure to stocks in recent weeks–both bullish and bearish positions–amid the selloff in high-flying technology stocks, Credit Suisse says.
Overall bets on higher stock prices have fallen to their lowest level since August 2012, with the steepest cuts coming over the past month, according to the bank. That can be seen in the “long/short ratio” which compares the amount of long positions to short positions. That ratio has fallen to 46% among the bank’s prime brokerage clients, down from a peak of 58% earlier this year, according to an April 9 report from Credit Suisse.
“It’s battening down the hatches to weather the storm,” said Jon Kinderlerer, managing director at Credit Suisse’s prime brokerage business.
Within the stock market, hedge funds have been shuffling their holdings as well. Funds have been cutting their exposure to high-growth areas of the market and boosting their bets on more defensive sectors. As recently as last fall, bets by hedge funds on so-called cyclical stocks—sectors seen as benefiting from an expanding economy, such as technology and retail—were 12.9 times greater than their bets on defensive stocks.
Now, the figure has dropped to about 5.7.
Many funds had crowded into bets on the high-flying growth stocks that have fallen sharply in the recent market rout.
“We’ve certainly seen risk reduction in the hedge fund space,” said Mr. Kinderlerer. “It’s not a frantic rush for the exits, but gross exposure has come down—just taking down the book size.”
Overall market exposure has also declined. Hedge funds curb their exposure to stocks not just by ditching riskier long positions, but also by closing negative bets and moving into cash. Such moves can lead to a sudden rally in heavily shorted stocks, a phenomenon that took place earlier this week.
Meanwhile, hedge funds have been loading up insurance against further declines by purchasing options contracts that become more valuable if the stock market continues to fall, Mr. Kinderlerer said.