>Hedge Fund Monitor (MERRILL LYNCH)

1Q performance appears to be negative but beats S&P 500

Large Specs buy equities, gold and 10Y-Ts; sell oil, the Yen
Note: Commitment of Traders data reflects positions as of last’s Tues close
Equities: Large specs continued to add to their net long position in the S&P 500 futures last week. Readings are back near a crowded long. However, our factor analysis models suggest market exposure may be peaking and part of the increase may be due to hedging as in December (see below and pg 3 for details). They also continued to cover their net short positions in the NDX and the R2000. HFs are still a source of liquidity for the markets but less so with a potential buying power of ~$6b, consisting of ~$2b R2000 and ~$4b NDX.

Metals: Large specs modestly added to their long position in gold last week; readings are crowded. They reduced their silver and platinum longs, while holding steady their short positions in copper.

Energy: HFs sold crude oil last week and continued to add to their deep short position in natural gas. Additionally, they continued to buy heating oil and sold gasoline.

Forex: Large specs covered their shorts in the Euro last week and held steady the USD. Additionally, they continued to sell the Yen.

Interest Rates: HFs continued to buy the 2-Yr Ts to move further into a crowded long, while modestly covering their shorts in the 10-Yr Ts and 30-Yr T-Bonds.

M/N and L/S hedge funds further reduce equities exposure
Our models indicate M/N and L/S funds’ market exposure continuing to decline last week, adding to their underweighting of equities. Our estimates suggest market exposure for M/N and L/S funds peaking in late March, after rising significantly from mid-Dec through much of Q1 (more details on pg 3). Other L/S tilts: Growth, large caps and high quality. Inflationary expectations have also increased sharply (pp 5-6).

Macros buy back shorts in SPX,10 Yr-Ts & commodities; sell US$
Our models point to Macro funds covering their shorts in the S&P 500 last week, while selling the NDX. Additionally, they continued to reduce their longs in the US$ index and cover more of their shorts in the 10-Yr Ts and commodities. We also estimate Macro HFs modestly covering their short positions in the Emerging markets last week, while increasing their shorts in the EAFE markets; readings are volatile.

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