Hedge Funds Haven't Owned This Much Of The Stock Market Since Right Before The Crash In 2008

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Two interesting stats on hedge fund exposure to the market via BofA Merrill Lynch analysts  Stephen Suttmeier,  Jue Xiong, and   MacNeil Curry:

  1. In the first quarter of 2013, net exposure (the difference between long and short positions in stocks) rose to match the previous peak (made in the second quarter of 2007).
  2. The percentage of the stock market (specifically, the Russell 3000 float) owned by hedge funds is now the highest since the second quarter of 2008.

In their Hedge Fund Quarterly Report, the BAML analysts write:

Based on the quarterly 13F filings and estimated short positions of the equity holdings of 895 funds, we estimate that hedge funds reduced cash holdings to the 2Q07 trough of 4.3%, while raising net exposure to the 2Q07 peak of 59% in 1Q13. Meanwhile, dollar notional net exposure rose by 11% to $463bn notional in 1Q13 – setting a new record. The bullish positioning indicates that risk appetite is back to the peak set in 2007.

Gross exposure rose by 12% to $1280bn notional in 1Q13. Percentage-wise, gross exposure increased to about 160%. When including ETF positions the gross exposure increases to 180%.

Note: Our estimates are based on analyses of hedge fund equity holdings only and do not include derivatives, which are potentially a larger source of exposure and leverage; readings are best used as a gauge, rather than a cardinal measure of exposure levels.

The orange bars on the chart below show net exposure, back to its previous peak:

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Estimated hedge fund % long and short exposures by quarter

BofA Merrill Lynch Global Research, LionShares


There's more.

According to the report, "At of the end of 1Q13, hedge funds owned 5.0% of the Russell 3000 float shares, second only to the 2Q08 peak of 5.1%."

The chart below illustrates that:

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HF % ownership of Russell 3000 float (2005-2013)

BofA Merrill Lynch Global Research, LionShares

So, what are hedge funds exposed to?

Consumer discretionary, information technology, and financials, although they pared net exposure to IT and financials in the first quarter. Consumer staples, while accounting for a relatively small portion of total exposure, saw the second-largest increase in weighting from the fourth quarter of 2012, behind only consumer discretionary names.

The table below breaks it all down.

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Hedge fund portfolio allocation by sector in 1Q13 on US$ basis

BofA Merrill Lynch Global Research, Bloomberg, LionShares




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