Sudden Jump in Hedge-Fund Exposure Flashes Warning for Equities

(Bloomberg) -- Trend-following hedge funds have boosted exposure to U.S. stocks to a point that may signal declines ahead.

While equity-focused hedge funds are under-invested in stocks, those that follow trends -- macro investors and commodity trading funds -- “have suddenly seen the light, going from 25% short exposure in March to more than 50% long exposure by late last week,” according to Jason Goepfert, founder of Sundial Capital Research Inc.

Exceeding the 50% mark for the first time in 30 or more days has often presaged declines, Goepfert wrote in a note, which analyzed S&P 500 Index’s price action going back to 2003. The returns for the index were “particularly weak over the next two months, and the risk/reward was terrible for up to three months later,” he wrote.

Sudden Jump in Hedge-Fund Exposure Flashes Warning for Equities

The S&P 500 was down by a median of 0.3% two weeks after such a signal and off by 1.4% two months later, Goepfert wrote.

Positioning has been in focus recently, with JPMorgan Chase & Co. saying on July 12 that equity upside might be limited because non-bank investors are overweight stocks relative to levels over the past decade. Jefferies said July 15 that recent flows into equity funds have been almost absent.

Goepfert doesn’t think his analysis indicates all is lost.

“This is primarily a shorter-term worry, especially given that equity-only funds seem to be heavily under-invested on a longer time frame,” he said.

©2019 Bloomberg L.P.

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