Hedge funds are cautious on oil, small caps and emerging market FX, that’s according to Société Générale’s monthly Hedge Fund Watch report.
The report, which draws on data from EUREKAHEDGE, an independent data provider that tracks over 24,686 alternative funds globally, and the Commodity Futures Trading Commission, follows hedge fund positions either long or short on a monthly basis to uncover valuable insights on market trends.
How Normal Investors Can Use The Same Strategies As Hedge Funds
The most recent report, published on January 13 (data collected up to 29/12), shows a reduction in risk appetite among hedge funds during the early days of 2016 — similar to broader market trends.
Notable changes in sentiment include: net long positions on oil have reached their lowest level since December 2012; short positions on small caps (Russell 2000) have increased; net short positions on EM currencies versus the dollar have all increased and; hedge funds have switched to net long positions on the yen and Swiss franc.
Hedge funds: Conviction by asset class
On an asset class by asset class basis, hedge funds are most positive on the outlook for the Nikkei and sugar with net long positions running 1.4 and 1.6 standard deviations away from the historical average.
In FX, the Mexican Peso and Canadian Dollar are the most hated currencies. Net short positions are 1.6 and 1.65 standard deviations away from the historical average respectively. Interestingly, funds are still net long crude oil, even after recent declines. Crude oil net longs are around 0.1 standard deviations above the historical average.
However, as noted above, net long positions on oil have reached their lowest level since December 2012, although long only positions are still close to the highest level in ten years.
Staying on commodities, hedge funds are most positive on the outlook for sugar and particularly negative on the outlook for wheat. Wheat net shorts are running 2.5 standard deviations below the historical average.
Despite the recent market turbulence, hedge funds remain upbeat about the outlook for the Nasdaq and only slightly cautious about the outlook for the S&P 500. Net positions on Nasdaq 100 (combination of standard contracts and E-Mini contracts) remain around their 12-month net long average, while net positions on S&P 500 (combination of standard contracts and E-Mini contracts) remained net short, as has been the case since February of last year. However, net shorts on the Russell 2000 hit a 12-month high during December, and open interest has also peaked at a one-year high.
Finally, hedge funds remain net buyers of gold, but buying has reached its lowest level in 12 months, although open interest has reached its highest level in 12 months. Swap dealers are the only group with a net long position in gold. The commercial traders and managed money groups are, in aggregate, short the yellow metal.
Hedge funds: 2015 a year of growth
Until December, 2015 was a year of growth for the hedge fund industry. Indeed, according to SocGen’s research, hedge funds reported net capital inflows every month until the fourth quarter, taking the total value of assets under management (AUM) to a record of just over $2.2 trillion — this figure is up for debate, barclayhedge.com reports that the industry’s AUM was $2.7 trillion at the end of Q3 2015 with a further $448 billion in funds of funds.
CTA/Managed Futures hedge funds saw the largest net inflows for the year at around 15% of assets under management. Funds following distressed debt or arbitrage strategies saw the greatest outflows for the year.
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