TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING?

Takeaway: HF investors may be increasingly forced to flip-flop their L/S book by selling 2014’s losers in order to fund a chase in 2014’s winners.

38.5% through CY14, hedge funds have found themselves broadly underwater remaining long our preferred exposures in the Hedgeye 2013 Macro Playbook and short our least-liked ones. The key issue with that is that it’s 2014, not 2013. Macro markets have been front-running a cessation of our #StrongDollar + #RatesRising = #StrongAmerica view since JAN.

 

To recap hedge fund performance:

 

  • HFRX Equity Hedge Fund Index: -166bps MTD, -306bps QTD and -185bps YTD
  • HFRX Macro/CTA Index: -57bps MTD, -113bps QTD and -216bps YTD

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - 1

 

Obviously, we have number of hedge fund customers, so we don’t write this to be trite or disrespectful. We only call this to your attention because if this trend of poor performance continues, there will likely be an industry-wide lowering of gross exposures and tightening of net exposures, with capital outflows as a key tail risk.

 

With the exception of a handful of very astute investors (and an independent research firm domiciled in CT), it’s become increasingly clear through monitoring performance and collecting anecdotes that the majority of the hedge fund space came into 2014 with basically the same exposures:

 

  • LONG BOOK: US equities – particularly the growth style factor(s) and Japanese equities.
  • SHORT BOOK: US Treasury bonds, long-duration credit, everything-EM, commodities and the Japanese yen.

 

A subtle, but important callout here is that with the exception of a handful of very astute investors (and an independent research firm domiciled in CT), not everyone nailed front-running all of these major macro moves in 2013 (e.g. HFRX Macro/CTA Index down -1.8% in 2013 vs. S&P 500 Index up +29.6%). That means there’s likely a fair amount of funds that jammed into the 2013 playbook at precisely the wrong time (i.e. just in time for CY13 “window dressing”).  

 

The key risk here for investors to manage is that the longer 2013’s losers (i.e. the aforementioned SHORT BOOK) continue to exhibit higher degrees of relative momentum on a trending basis, the greater risk there is to the upside, given the crowded nature of these trades and the propensity for investors to unwind such underwater exposures at roughly same time – likely on the same catalyst(s).

 

Our TACRM All-Weather System continues to signal rotation-based flows into Fixed Income & Yield Chasing and EM Equities as primary asset classes, in lieu of DM Equities, at the margins:

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM Global Macro Weathervane

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM Global Macro Barometer

 

This is a direct function of the relative momentum taking place at the secondary asset class level – which is more-or-less a 180° flip from 2013:

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM Global Macro Thermodynamic Monitor

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM Heat Map

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - TACRM 20 20 Vision Thermodynnmic Monitor

 

For more details on how to interpret these charts, please review the following presentation: http://docs.hedgeye.com/HE_TACRM_2014.pdf. Email us if you’re interested in how TACRM can beef up your research and risk management processes; we are happy to customize it to your watch list.

 

Going back to the aforementioned point regarding the rotation in Fixed Income & Yield Chasing and EM Equities, we encourage you to review the following two research notes:

 

 

If a trip to Quad #3 on our GIP model is not “the catalyst” mentioned above, then we too are still searching for that “ah ha” moment.

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - UNITED STATES

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - 7

 

TACRM SAYS STICK W/ THE GAME PLAN... ARE YOU LISTENING? - 8

 

Even without a catalyst, the risk that fund managers are broadly forced to sell 2013’s winners in order to finance an industry-wide performance chase in 2014’s winners is not inconsequential. That would roughly equate to investors broadly flipping their entire exposures (and thesis) on its head, so we’re comfortable with our anecdotal evidence that most people have yet to do so.

 

In fact, our conversations with some customers and prospective customers have gone a lot like this:

 

  • Hedgeye Macro Team: “We continue to like bonds, slow-growth/yield chasing stocks like Utes and REITs, commodities and emerging markets in lieu of things like US and Japanese equities and the US dollar.”
  • Investor: “Nice call. I hear ya, but I can’t justify buying Utilities up here. They are so expensive now. I feel like the money has already been made.”
  • Hedgeye Macro Team: “Ok, that’s fair. You know how we feel about valuation not being a catalyst, but, at a bare minimum, don’t be short these markets. The risk in these asset classes is up, not down, given the consensus lean in the hedge fund community.”
  • Investor: “Got it; thanks.”

 

If we had this conversation 10 times in the past week, we’ve had it 1,000 times since FEB. Make this the 1,001th  time.

 

Have a great evening,

 

DD

 

Darius Dale

Associate: Macro Team


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more