>Hedge Fund Monitor (MERRILL LYNCH)

HFs short 10-year T-note to levels not seen since April ‘05

Large Specs buy gold, 2Y-Ts; sell NDX, oil, US$ and 10Y-Ts
Note: Commitment of Traders data reflects positions as of last’s Tues close
Equities: Large specs decreased their net long position in the S&P 500 futures last week while also continuing to pullback on their crowded longs in the NDX. In recent weeks readings in the NDX 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 ~$9b, consisting of $6b in the SPX and $3b in the R2000.
Metals: Large specs marginally added to their gold longs last week, while aggressively buying silver. Additionally they modestly added to their net shorts in copper.
Energy: HFs sold crude oil last week to go net short, while adding to their deep short position in natural gas. Additionally, they marginally increased their longs in heating oil and moved sharply back into a crowded long in gasoline.
Forex: Large specs covered the Euro last week, while modestly selling the USD. They also added to their net shorts in the Yen.
Interest Rates: HFs increased their longs in the 2-Yr Ts, while increasing their significant shorts in the 10-Yr Ts. They also 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 after falling rapidly in late March and early April; both still remain underweight equities though (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 current rally (for reference see Hedge Fund Monitor, 13 April 2009). We also note a significant shift by M/N and L/S funds towards Low quality from High. Low quality has significantly outperformed in this rally, but that may be changing.

Macros sell the SPX, commodities; buy the NDX, US$, 10 Yr-Ts
Our models suggest Macro HFs added to their crowded net short in the S&P 500 last week, while buying the NDX. Additionally, they continued to buy the US$ index and modestly covered their shorts in the 10-Yr Ts, while selling commodities. We also estimate Macro HFs were flat the Emerging markets and bought the EAFE markets.

To see full report: HEDGE FUND MONITOR