Hedge Funds Are Fleeing Stocks: 1 Chart Tells The Story

• Evercore ISI’s hedge fund survey indicates that funds have their lowest net long exposure to stocks in two years.
• Net long exposure to stocks peaked in September of 2014.
• Analyst James Walsh says that funds’ net exposure has been a good contrary indicator of stock market movement.

In a new report, Evercore ISI analyst James Walsh takes a look at hedge fund exposure to stocks. According to Evercore’s most recent survey, funds have been consistently reducing exposure to stocks for quite a while.

Method
Evercore surveyed 31 hedge funds with net assets of about $86 billion and asked them to rate their long exposure to stocks on a scale of 0 to 100 where 50 indicates normal net exposure. “Over the years, we have noticed that our hedge fund survey has been a good contrary indicator for the market,” Walsh writes.

Net exposure
Evercore uses the survey data to calculate what it calls “net exposure.” To calculate a fund’s net exposure, the value of a fund’s short positions is subtracted from the value of a fund’s long positions. The result is then divided by the fund’s total portfolio value to produce net exposure.

The numbers
In recent weeks, funds’ net exposure to stocks has fallen to about 49, its lowest level in two years. Net exposure reached its peak at around 54 back in September of 2014, but since that time it has drifted to new multi-year lows. By comparison, the S&P 500 is sitting much higher than its August 2013 level.


Other selling
It’s not just hedge funds that are reducing exposure to stocks. Bank of America reported $1.7 billion net outflows from its clients in the first full week of October. The firm noted that the healthcare and financial sectors were the most heavily-sold sectors on the week.

The Select Sector Financial Slct SPDR Fd XLF and the Health Care SPDR (ETF) XLV are both up more than 1.5 percent so far in October.

Disclosure: the author holds no position in the stocks mentioned.