However the more recent de-leveraging that we have seen in extreme fashion has been very pronounced over the last month. While the 2012 yearly data is very important and very interesting, the re-positioning over the last month has been even more telling as our charts have been suggesting.
One of the recent themes I have been talking about is the severe underperformance of hedge funds through 2012 with only a paltry 11% outperforming the S&P-500. When Q3 ends in September, the re-demptions will start coming in fast and furious, the end of 2012 will be more dramatic.
The flows of "Leveraged Money" (Hedge Funds) over the last month suggest exactly what I have been showing you virtually market wide, I have even commented that I don't recall ever seeing such a dramatic change in character, not just in the averages, but Industry groups and bellwether stocks, you can literally see key levels such as AAPL $600 where the move down in 3C is very clear.
When we are following the movement of such flows, we have to keep in mind how their process of re-posiitoning is different than ours, these are huge positions, they can't be changed significantly in a short period of time, especially big flow changes so rather than an event, they tend to be a process.
If you are a large fund manager holding a large position in AAPL, you need demand to sell in to or short in to, you need retail buyers to take those shares off your hands and since retail doesn't buy in the size needed, it takes some time. More than that, it takes a psychological event that will bring retail in to the market. If we consider what moves the market it comes down to two very simple things, Fear and Greed. Greed is triggered by making retail think they are missing a move and typically a significant pyschological/ technical level has to be broken. Fear is by far a stronger emotion, just look at the bottom of the 2002 SPX move to the top in 2007 and how quickly that move was erased and then some in about one quarter of the time.
A couple of examples...
This happens on all timeframes for a variety of reasons, mostly though it comes down to the unchanging reality of human emotion.
As for the point of the article, $600 in AAPL is a major psychological level, century marks are always important psychological levels, while that may have been one of the biggest, it certainly wasn't the last, but it did see a major change in character. Keep in mind, among hedge funds, AAPL is by far most widely held equity.
If anyone recalls what happened to legendary fund manager, John Paulson's Advantage Plus Fund in 2011, the flagship Advantage Plus lost more than 50% of its value in 2011 alone. Among Paulson's top 5 holdings, the only profitable position was GLD; At the end of the third quarter, Paulson was the largest shareholder of the SPDR Gold Trust (GLD) exchange-traded fund with about 20 million shares, according to quarterly regulatory filing, but he had slashed his holdings in Q3/Q4 of 2011 as the new year rolled around and redemptions in the fund hit hard, GLD saw a sharp sell-off. Look how the character of GLD changed in Q3/Q4 of 2011, the most significant loss in GLD in years.
Look at the macro change in character starting in Q3 2011 in GLD/3C.
Back to the point of the post, Hedge Fund Flows for the year and more importantly for the month.
Leveraged Money is simply another word for Hedge Funds, note the difference between Leveraged Funds and "Real Money"-non-leveraged accounts. It seems the question of high yield credit performance has finally been answered, Hedge Funds are doing what I've been expecting to see in High Yield but haven't, one of the few bothersome questions is apparently answered as High Yield Credit leads equities, "Credit leads, stocks follow".
Hedge Funds (red) have moved out of High Yield at an incredibly fast rate, now with less exposure than anytime since 2009. Note Hedge funds moved in to High Yield at exactly the right time in 2009 while un-leveraged, "Real Money" was wrong, moving out in 2009, again they are diverging significantly.
If we compare un-leveraged "real money" vs leveraged Hedge Funds and the changes they have made in the last month, hedge funds on the right side have moved aggresively out of Cyclicals and in to non-cyclicals.
What does this big change in the last month mean? Cyclical companies are highly correlated to the economy. The sales of companies with cyclical stocks depend on whether or not the economy is strong; sales will thrive when people have extra income to spend on luxuries, and they'll decline when the economy slumps. These are the stocks hedge funds have moved out of rapidly over the last month, AAPL would certainly be considered a "Cyclical", probably explaining why the AAPL chart has looked the way it has looked over the last month.
Non-Cyclicals are also known as defensive stocks, they tend to see profits regardless of economic
gyrations because they produce or distribute goods and services we always need: food, power, water and gas. Hedge Funds have moved in to Non-Cyclicals over the last month.
The bottom line, hedge funds moved out of the "Risk-on" trades and in to the "Risk-Off"/Defensive positions over the last month, you might say they have used the rally to sell in to or even short in to.
The changes can also be seen in very simple sector rotation right out in the open without even looking at underlying trade.
Staples, HealthCare and Utilities are defensive sectors. This is hardly the most convincing chart for me, but it is interesting.
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