Survey: Hedge Funds Bearish On Equities

Sep 18 2008 | 12:05pm ET

Expectations of a global economic recession have risen sharply among hedge fund managers, and risk aversion has reached a new high.

According to Merrill Lynch, 61% of fund managers surveyed believe a recession is likely in the next 12 months. Echoing these fears, investors are more risk-averse—the survey's risk and liquidity composite has fallen to its lowest level in over a decade. The results, collected after the Federal Reserve's takeover of mortgage giants Fannie Mae and Freddie Mac, but before the failure of Lehman Brothers, show that investors have adopted more defensive strategies and shortened their investment time horizons.

Highlighting reduced risk appetite is how hedge funds have become acutely more bearish in equities. Nearly one in four hedge funds surveyed said that they have a net short equities position, compared with 6% who held net short equities positions in August. At the same time hedge funds are reducing, or being forced to reduce, their leverage. The weighted average ratio of gross assets to debt fell from 1.2 times in August to 1 times in September. More than half of respondents to the question have a leverage ratio of less than 1 times.

Liquidity conditions (depth of market and ease of trade) have worsened, with 39% of respondents who rate conditions as negative compared with half of this amount in August. Highlighting the flight to safety, the survey found investors to be overweight bonds for the first time in over a decade.

Investors have also moved to their largest underweight position in emerging market equities since 2001, thanks to falling commodity prices, global growth concerns and residual inflation fears in emerging market economies.


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