Hedge Funds Are Fleeing Stocks: One Chart Tells The Story

Net-long exposure to stocks peaked in September of 2014. Analyst James Walsh said that funds net exposure has been a good contrary indicator of stock market movement.

In a new report, Evercore ISI analyst James Walsh looked at hedge fund exposure to stocks. According to Evercores 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 wrote.

Net Exposure

Evercore uses the survey data to calculate what it calls net exposure. To calculate a funds net exposure, the value of a funds short positions is subtracted from the value of a funds long positions. The result is then divided by the funds 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; however, since then, 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 Action

Its 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 Str SPDR Fd (NYSE:XLF) and the Health Care SPDR (ETF) (NYSE:XLV) are both up more than 1.5 percent so far in October.

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

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