U.S. stocks have piled up $1.5 trillion in market value this year, but hedge funds are bracing for tough times ahead.
Based on buying and selling in 2017, managers have stopped loading up on bullish positioning. They’ve also become less reliant on U.S. stocks by selling economically sensitive bank shares and materials like copper, data compiled by Credit Suisse Group AG show. What are they buying? Gold.
It’s a shift from late December, when hedge fund exposure to U.S. stocks, particularly financials, reached near record levels.
In part, the move is as simple as prudent management, with funds taking profit after the longest rally in banking shares since 2013, said Benjamin Dunn, president of Alpha Theory LLC, which works with hedge funds overseeing about $6 billion. At the same time, the shift reflects lingering questions about the pace of policy changes and economic improvements, he said.
“The conversation I have with a lot of funds is, ‘My crystal ball is really cloudy right now,’’’ Dunn said. “There’s a lot of wait and see because the soft data is good but hard data hasn’t picked up.”
Valuations Stretched
Record U.S. equity averages and improving business and consumer sentiment are countered by mixed economic data. Many analysts lowered estimates of first-quarter growth after consumer spending, the economy’s primary fuel, increased less than forecast in January. At the same time, the Federal Reserve is poised to raise interest rates as soon as this month.
The gap between two-year and 30-year interest rates, known as a yield curve, hovers near its lowest level in four months, data from Bloomberg show, suggesting limited potential for growth and inflation.
Though growth could pick up down the road, valuations may have stretched too far for comfort, said Mark Connors, Credit Suisse’s global head of risk advisory in New York. Taking a more defensive stance protects fund managers whose lack of bearish bets would leave them vulnerable to any sudden sell offs.
“Caution, hesitation on valuations, whatever you want to call it, now they’re digesting information while the yield curve is flattening, not steepening,” said Connors by phone.