Hedge Funds Reducing Equity Exposure – Smart Money or Dumb Money?

Interesting piece here in yesterday’s Financial Times.   Hedge funds are reducing exposure to equities as the industry tries to adapt to the increasingly competitive investment landscape:

“Investors have fallen so far out of love with stocks that assets in fixed income hedge funds are poised to overtake those in equity trading strategies for the first time in the history of the $2tn industry.

The dramatic shift comes as investors continue their search for steady returns even as warnings intensify about the danger of owning bonds offering very low yields .

At the end of the third quarter, both equity hedge funds and relative value arbitrage – a catch-all for a variety of fixed income strategies – managed $586bn each. “It’s highly likely that by the end of the year equities will no longer be the largest strategy, and that has never happened before”, said Ken Heinz, president of HFR, the data provider.”

Some people might be inclined to assume that this means the so-called “smart money” is turning against stocks, but I am not so sure.  I think it’s more indicative of typical investor sentiment as fixed income demand grows due to the zero interest rate policy, continuing risk aversion and chasing the huge 30 year rally in t-bonds.  Said differently, hedge funds, they’re just like all other investors.  And in this case, the macro trends in the industry are probably more indicative of herding and performance chasing as opposed to “smart money” moving into the “next big thing”.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. the headline and the quote don´t fit.
    headline is about HFs while the article describes what INVESTORS in hedgefunds are doing.

    usually investors are considered dumb money. the asset allocation in equity and fixed income HFs just mirrors what has been happenening in mutual fund flows for years.

    but since HFs are playing in QE that allows for byuing and flipping MBS to the fed, that doesn´t seem to be such a stupid move.

  2. Or we could just look at HF performance over the last few years and see the real truth of what dumb money looks like..!?

    Outliers accepted.

  3. Bonds is a crowded, unidirectional, trade right now. Nonetheless, we shouldn’t underestimate the force of a trend. The BLV /GLD (long-term bond term bond /gold) ratio is an interesting one to monitor in order to ascertain when a sell-off in bonds is likely to occur. Currently, the ratio is bullish in favor of bonds (and hence holding gold hostage and ranged-bound). However, when/if the ratio turns bearish in favor of gold, bonds will start to suffer. More about the ratio and the key level to monitor here: