What are the pros doing?
I’ve been speaking with various institutional investors, and I can tell you there is little in the way of uniformity of thought. Here we are, up 70% or so from the lows of over a year ago, and there is no consensus — which is probably a good thing.
What are they thinking about? The health care bill, financial reform, the federal deficit, tax policy, a bubble in china, hyper-inflation, structural unemployment, another lost decade, and even demographics, their concerns are many and varied.
Their investment postures are even more varied. I can oversimplify them into one of five buckets
1) All In: They caught the bottom, or jumped in not much after it. They have been long and strong the whole run. They see no end in sight. Some are leveraged, some used options. My estimate: About 10% of pros fall into this camp.
2) Not-Too-Late: They joined the party later in the rally, and are still carrying some cash (10-20%) but not excessive amounts. They are not sure why we have been going higher, but feel they must participate. (About 20% of pros)
3) Reluctantly, Partially Invested: The group that originally fought the rally, but honored their stop loss discipline to flip from short to long around June of last year (after the pullback reversed). They are a combination of Global Macro traders and Long/Short funds who hate this environment, along with Trend followers who don’t want to fight the tape. They are carrying too much cash — from 20% to as much as 50%. Many are looking for the next opportunity to get short. (About 30%)
4) Bought It, Sold It, Waiting for Clarity: This group had a very good 2009, but did not want to overstay their welcome. They hit the bid near year end, and took huge performance fees. They moved aggressively to cash — 50%+ — and have dabbled on the short side. They are waiting for the next inflection point to redeploy capital in either direction. (~20%)
5) Missed it Totally, Waiting for Vindication: The “structural economic problems” and “Unconscionable Federal Reserve actions” have kept this group out of the markets. They are awaiting the next leg down, a retest of the lows, and then a break even lower. They are well stocked with Puts, bottled water, and MREs. This was a bigger cohort, but investor pressure and stress have reduced their numbers. (Down to less than 5% of hedge funds)
That’s about 85%, as there are others who simply don’t fall neatly into one of these buckets.