Hedge funds have helped drive the stock market rally, ramping up their exposure to equities even as coronavirus concerns remain prevalent, according to Bank of America Corp.
Their net long exposure to equities jumped to 34 percent this month, up 15 percentage points from April, Bank of America found in its latest survey of fund managers. That’s the biggest monthly increase for hedge funds since June 2018, bringing their stock exposure to just under levels seen in early 2020.
But hedge funds are participating in a rebound investors fear won’t last, according to the probe. Fund managers remain extremely bearish, maintaining cash levels above the ten-year average amid concern another surge in Covid-19 cases looms as the economy begins reopening.
Slightly more than half of those surveyed said the biggest “tail risk” is a second wave of infections from the novel virus that causes the Covid-19 disease. The next top worries are permanently high unemployment, cited by 15 percent of fund managers, and a break-up of the European Union, flagged by 11 percent.
Amid the Federal Reserve’s unprecedented support of markets, Bank of America found the portion of fund managers who see a systemic credit event as the biggest tail risk dropped this month to 8 percent, from 30 percent in April. Stocks, meanwhile, have soared from this year’s trough in March, recovering as the U.S. government offered support to businesses and workers so they might survive the economic shutdown during the pandemic.
Still, a majority of fund managers surveyed by Bank of America chalked it up to a “bear market rally,” keeping their cash levels high at 5.7 percent. While the Standard & Poor’s 500 index climbed 32 percent between its March 23 low and the close on May 18, performance remained down about nine percent for the year.
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Similarly, hedge fund gains in April did not make up for losses in 2020. Preliminary data from Preqin show hedge funds lost five percent during the first fourth months of the year — even with a 6.4 percent return in April.
Long bets in U.S. technology and growth stocks are now the most crowded trade cited by fund managers in Bank of America’s survey. A net 23 percent of managers expect value stocks to underperform growth, with the bank saying the last time as many held that view was in December 2007.
The recovery from the financial crisis that followed in 2008 was long and slow. Today’s downturn has many guessing what an economic recovery could look like after the novel coronavirus led the U.S. unemployment rate to spike to 14.7 percent in April.
Three quarters of investors surveyed this month by Bank of America expect an economic recovery to take the shape of a U or W. It would probably take a vaccine to see a V-shaped rebound, a form of recovery only 10 percent of fund managers are expecting, the bank said.
