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Hedge funds boost stock exposure in Q3

Date: Tuesday, November 24, 2009
Author: Joseph A. Giannone, Reuters

Hedge funds, in the third quarter, showed their greatest appetite for stock market risk in two years, according to research from Goldman Sachs on Monday.

The investment bank's latest Hedge Fund Trend Monitor, which analyzed regulatory disclosures from 684 funds, found these closely watched investors had amassed $604 billion (365 billion pounds) of long equity positions.

Estimating these same funds had $363 billion in short positions, net long exposure rose to 40 percent. That marks the highest, most bullish level since December 2007 as funds moved to benefit from a rising market, Goldman's analysts wrote.

"The equity market appreciated 16 percent during the quarter, suggesting that hedge fund net exposure increased as a result of active equity buying as well as short covering," Goldman analysts wrote.

Goldman observed that hedge funds, though upping the ante on every sector, in particular raised their net long exposure in financials: to 29 percent from 9 percent in the second quarter and from net short positions last year.

Funds also showed greater interest in information technology and consumer discretionary companies. Industrial companies were the only sector where hedge funds pared their exposure.

At the same time, hedge funds spread their bets more.

The share of hedge fund portfolios concentrated in top ten positions fell during the quarter to 62 percent from a peak of 68 percent in the final quarter of 2008. The weighting of the average stock in a hedge fund portfolio slipped 10 basis points to 2.0 percent.

The moves, though apparently small, marked the largest declines in these measures since 2003, Goldman said, and could help hedge funds avoid the kind of "crowded" trades that trapped quantitative funds in 2007 and all kinds of funds during the great selloff of 2008.

The stock most frequently found as a top 10 hedge fund holding on September 30 was Pfizer Inc (PFE.N), followed by Apple Inc (AAPL.O), Bank of America Corp (BAC.N) and Schering-Plough SGP.N.

The stocks with the greatest concentration in hedge fund portfolios were led by Sears Holdings Corp (SHLD.O), AutoNation (AN.N) and AutoZone (AZO.N), followed by E*Trade Financial Corp (ETFC.O) and CF Industries Holdings Inc (CF.N).

Net long exposure measures a fund's investments plus the effect of leverage, offset by short-sales.