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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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