>HEDGE FUND MONITOR (MERRILL LYNCH)

HFs’ sharply reduce net long in NDX; HF’s selling $ buying €

■ Large Specs buy gold, oil & 2Y-T’s; sell NDX & US$
Note: Commitment of Traders data reflects positions as of last’s Tues close

Equities: Large specs held steady their net long position in the S&P 500 futures last week while continuing to reduce their longs in the NDX. In recent weeks readings in the NDX had reached their highest levels since Oct 07- when the NDX subsequently fell 6.7% 1month on. Large specs also added to their shorts in the Russell 2000. HFs are still a source of liquidity for the markets but less so with a potential buying power of ~10b, consisting of $6b in the SPX, $1b in the NDX and $3b in the R2000.

Metals: Large specs added to their gold longs last week, while also buying silver and platinum. Additionally they held steady their net shorts in copper.

Energy: HFs covered crude oil last week, while adding to their deep shorts in natural gas. Additionally, they increased their longs in heating oil.

Forex: Large specs bought the Euro last week, while modestly selling the USD. They also covered their net shorts in the Yen.

Interest Rates: HFs increased their longs in the 2-Yr Ts, while covering more of their significant shorts in the 10-Yr Ts. They added to their shorts in the 30-Yr T-Bonds.

■ M/N and L/S hedge funds’ market exposure continue to improve
Our models indicate both M/N and L/S funds’ market exposure continuing to improve reversing the rapid fall in beta from late March and early April; both are now only moderately underweight equities (pp 3-4). It is potentially bullish for equities if HFs, with substantial cash on the sidelines and facing significantly lower outflows in Q2, return to the markets. M/N HFs were big losers in April because of their sharp drop in beta during much of the rally (see Hedge Fund Monitor, 13 April 2009). We also note a significant shift by funds away from High Quality to Low and from Growth to Value.

■ Macros sell the SPX, commodities; buy the US$, Emerging Mkts
Our models suggest Macro HFs added to their crowded net short in the S&P 500 last week, while holding steady the NDX. Additionally, they continued to buy the US$ index and modestly added to their shorts in the 10-Yr Ts, while continuing to sell commodities. They also continued to increase their small caps tilt relative to the large caps. We also estimate Macro HFs bought the Emerging markets and the EAFE markets last week.

To see full report: HEDGE FUND MONITOR