Hedgies Fade The Rally As 'Flows' Dominate Positioning

Tyler Durden's picture

Only 17% of credit managers (real or leveraged) expect notable widening in spreads (a rise in risk) by year-end, according to Citigroup's most recent client survey. This increasingly extreme bullish sentiment seems dominated by the trend of inflows into real-money accounts (which have chased high-beta, high-yield, and peripheral exposure) whereas hedge funds have used this most recent rally to reduce exposure to the peripheral, notably limited their HY exposure, increased their leveraged loan (secured credit) positioning, and increased core exposure. There remains an over-arching belief that the trend in flows will continue and that these flows will dominate market movements - however, the divergence between European bank and high-yield credit exposures (real-money getting longer, leveraged money reducing/getting short) is as dramatic as it as ever been. The last time we saw such a bull/bear divergence between real- and leveraged-money was at the bottom in Q1 2009 (but that time real-money was short and hedgies were adding longs - and were right!)


The divergence between real-money (flows) and leveraged-money (trades) in high-yield is dramatic - hedge funds have not been this 'neutral' since before the crash in '09 and so divergent...


Guessing flow-expectations - trend is your friend - seems like a recipe for disaster (though a profitable disaster for months) as every seasoned credit manager knows, the downside from losers far outweighs the upside from winners (especially in high-yield currently with convexity and call constraints). The question is - if we see any risk pullback on disappointment from Draghi/Bernanke, marginal liquidity will evaporate very quickly and it seems hedgies are positioning for this (and shifting up the capital structure into secured positions).


Via Citi:

Above all, though, it just feels to us as though markets have got ahead of themselves. Spreads remain close to their tights. YTD total returns are the second best on record, second only to 2009. Although one investor told us that “being bearish about September is so consensus”, we doubt that many are positioned that way. The strength of the Italian auction, the way sectoral and peripheral positions have crept longer in our survey, and the correlations between market moves and central bank liquidity all suggest otherwise. Given the number of holes here, and not just in Jackson, the market still feels quite likely to stumble further.


Real-money (left) vs hedge-funds (right) have seen very dramatically different positioning this month. So much for the 'money on the sidelines' myth...


One thing they do agree on - secured credit is a play: Leveraged Loan exposure rose on both sides...


But Only 17% expect spreads to widen more than the cost of carry into year-end - an extremely bullish positioning, no matter how much you hear about consensus concern for September...


Real and leveraged money remains short Peripheral and long Core - but as is clear from the charts below, real money has reduced its short periphery exposure and reduced its long core position.


Charts: Citi

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Newsboy's picture

Gold closed at $1666.60 on Tuesday 8/28/12.

A signal. Of what? Not something nice.

Be conservative, eh?

Ahmeexnal's picture

Over at silverdoctors.com all the articles seem to have been pulled with a "Wordpress database error" message.  Nasty banking weekend in process?

monopoly's picture

So much to digest. Hey all, do you agree....Tyler and gang should take the next 24 or so off and just give us an open thread so we can bullshit with each other if we want.

For the most part we cannot do anything till Tuesday morning, and I Know they can use a break. Amazing how much they do for us. Can you even imagine not having sites like ours and dependent on MSM and tabloids for the "real news". Scary thought. Donating to Zero Hedge is a no brainer for me.

What do you all think? Agree?

Meesohaawnee's picture

i find the posters here some of the best entertainment of all! You all are great! Very intelligent. i cant hold a candle to you all. Keep up the great work. . I dont know why i would do without ya! tyler. Thanks so much

Jake88's picture

I only read the comments anyway

bank guy in Brussels's picture

Doug Noland has another good new article yesterday, talking precisely about how this crazy 'risk on' attitude is being fueled by the central banks' posturing and claiming to have the back of the hedgies and speculators ... he writes:

« I strongly argue that the issue of whether the Fed is once again accommodating a Credit (“government finance”) Bubble is today’s prevailing – potentially catastrophic - policy risk. »

Doug's weekly 'Credit Bubble Bulletin' is always a good read -


sablya's picture

Thanks for posting that article reference.  That was an excellent read.  

Scalaris's picture

A commonsensically foresighted article, describing things as they are, vis-a-vis central banking policies that mandate pledges for open ended monetary intervention, consequenting to the fuelling of asset bubbles and increases in basic commodity prices due to dollar weakness, using the reasoning of an alleged incentivization for banking lending, as a pretence.

The fact that US commercial banking sector deposits is approaching $9 trillion, with a rate of deposit growth exceeding that of new loan demand and credit approvals, proves the non-correlation between asset purchasing programs, implemented by the Fed, and willingness of the banking sector for change in the rate of credit expansion.

I'd like to know why the same people who have been studying the aftereffects of every recent economic bubble, are repeating the same mistakes. Implementation of ultra-low rates, in the same way they have been introduced in the aftermath of the dot-com crash, which then in turn fuelled both the housing, and the current credit bubble, while creating imbalances, destabilizing capital markets, and causing systemic capital misallocation.

Other than that, his recent speech, indicating willingness for monetary action, despite the not-as-dismal economic data, and considering equity market levels, as well as certain asset classes prices ranges, refers me to the latest FOMC minutes, where it stated that additional quantitative stimulus would only be employed in "an absolute crisis situation, such as a major sovereign default in the Eurozone or an Iran induced global oil disruption". 

So perhaps Bernanke's prescience of an increased possibility regarding a large-scale credit event in Europe, or for the need of an adequate "cushioning", fearing a deflationary event and subsequent market downturn, instigate for further quantitative easing, prior to the fact.

Conjecture aside, the fact is that central marketplace interventions, had as outcomes, further market manipulations and instability, due to imprudent reach for yield and disregard for risk, caused by the artificial safety net of central planning, without any material, structural changes taking place, in order to prevent any future, similar outcomes.

spekulatn's picture

"If you want stability, prepare for instability" - Martin T - Macronomics."



hedgehog9999's picture



This is the best video on Ben's ineptitude and exposing the rigged game the GS and the FED have against all Americans...........................

sablya's picture

LOL, it seems that every message board and every response to every article has the same viewpoint against easing, against the Fed's policies, such that there appears to be a general consensus that Bernanke is doing the wrong thing consistently.  How is it possible, then, that no one is standing up to oppose this dangerous man?  Where is the public outcry?  Where is Congress?  Why can't this market manipulation be stopped??

PeeramidIdeologies's picture

LOL is right. While I'm sure those are retorical questions, if you consider the actions required, then consequences which will follow such a movement the answers will be clear. This system must be kept in it's current form at all costs. Period. The market will sort it out eventually. Maybe even learn a thing or two. In the mean time, I agree with hedgies, except I'll be waiting for a little reality check before buying in. 

Meesohaawnee's picture

because its the fox watchin the hen house thats why.. ive said many times on this board..quit thinking what "should " happen in this coutry. thats grannys old america. June Cleaver died a long time ago

hedgehog9999's picture

The masses are in the dark, the people you are referring to are a minority, I would venture less than 2% of the population "in the know of" :

"every message board and every response to every article has the same viewpoint against easing, against the Fed's policies, such that there appears to be a general consensus that Bernanke is doing the wrong thing consistently"

 ARE powerless to change the system, as for congress, they don't care except for a very small minority including Ron Paul and he's not getting anywhere, the massess ignorance and inaction is appalling but that is why Hiler, Mussolini , Stalin and company rose to power and  kept it for many, many years years.........................

brettd's picture

Oh, dear friend.

How many "reads" does a ZH article get?  Max:  30,000

That is 1/100th of the population in the USA.  Pity, eh?

warchopper's picture

Marc Faber quoted ZH this month in his newsletter.

Dollar Bill Hiccup's picture

What's really important is how the "fake" money is positioned.

Central Banks.


Schmuck Raker's picture

Some day I'm gonna understand posts like this and get stinkin' rich!

No shit.

IMA5U's picture

Bank Groans...  the easiest part of the credit market can now do its shimmy as its "the place to be."


Play the cards.  Not what you think the cards should be.

BenwaBall's picture

I'd put the % of Zerohedge readers who understand this article at about 1%.