Hedge Fund Margin Debt Falls Signalling Contrarian Buy Sign: BAML – ValueWalk Premium
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Hedge Fund Margin Debt Falls Signalling Contrarian Buy Sign: BAML

Leverage for hedge funds, as measured by NYSE Margin Debt, rose 35% year-on-year (YOY) in May, but fell from its April peak of $384bn for hedge funds. Historically, when leverage has peaked after a 33% or more YOY increase, the market tends to peak. Since the financial crisis, this occurred in April 2010 and then in May 2011, leading to a peak to trough market correction of 15.6% and 20.8%, respectively according to MacNeil Curry, CFA, CMT of BAML's hedge fund monitor. This could be a contrarian sign to buy.

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Net Free Credits (drawn from the NYSE Margin Debt data and shown in the chart below) is effectively a measure of cash levels in margin accounts. Net free credits for May were at a negative $86.8 million, improving from a negative $106.9 million in April.

More details from BAML weekly hedge fund monitor below

The Investable Hedge Fund Composite Index was down 2.10% for the month, as of June 26, worse than the S&P 500 (.INX) index’s price return of down 1.69%. Merger Arbitrage performed the best and was down a mere 0.38%. Equity Long Short performed the worst, falling 2.68%.

Examining hedge fund positioning by major strategies

BAML models indicate that Market Neutral increased market exposure to 11% net long from 3% net long. Equity Long/Short also raised market exposure to 28% net long from 23%, still below the 35-40% benchmark level. Macro funds slightly reduced their long exposures to the S&P 500, NASDAQ 100 and commodities, while selling US Dollar index and buying 10-yr Treasury notes. Overseas, they reduced EM exposure and turned net short EAFE for the 1st time since Apr.

Significant Hedge fund moves across asset classes, based on CFTC data

Equities. Large specs reduced their net long in the S&P 500, NASDAQ 100 and Russell 2000. S&P 500 remains in a crowded long, but barely.

Agriculture. Large specs bought soybean, sold corn, while covering 40% of their shorts in wheat. Wheat moved out of a crowded short.

Metals. Large specs sold metals across the board. They reduced longs in gold, silver, platinum and palladium, and added to their copper shorts. Gold and silver remain in the buy zone.

Energy. Large specs sold crude oil and gasoline, added to their shorts in heating oil, but partially covered natural gas. WTI crude oil remains in a crowded long; heating oil remains a crowded short. RBOB longs are at their lowest levels since Sep’10.

FX. Large specs sold Euros and the US $ Index, and partially covered Yen shorts. Positioning is neutral.

Interest Rates. Large specs sold 30-year and 2-year Treasuries, but bought 10-year Treasuries. Readings are neutral according to BAML.


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