Fund managers lift confidence for some

Hedge funds go defensive, mutuals dump stocks, and it’s all good

Active fund managers in the US and Europe have slashed their equity holdings — giving some Wall Street players confidence stocks have further room to run.

That may sound counterintuitive at first. But the reasoning is based on a wellestablished fear dogging this long-lived bull market: crowding, or the risk the investing herd will exacerbate sell-offs when volatility erupts.

With fast money getting defensive and mutual funds curbing stock allocations, the firepower of both groups to fuel bearish moves is now more limited.

It’s potentially a protective buffer at an opportune time, as volatility plumbs postFebruary lows and prompts warnings of a breakout on the heels of any trade war.

Risk removal

“The relatively lower levels of sentiment and the reduction in risk levels looks like it has probably removed at least one risk both to the market and to the performance of active managers,” Sanford C. Bernstein & Co quantitative strategists led by Inigo FraserJenkins wrote in a note.

“It is enough for us to be happy to continue with our pro-cyclical stance.”

Equity long-short hedge funds, for their part, have been tilting their holdings to less economically sensitive industries over the past month. The ratio of cyclical to defensive exposure is hovering just above a one-year low, according to Credit Suisse Group AG prime services data.

On the defensive

Hedge funds are now “certainly more defensive than global growth and GDP estimates would imply,” said Mark Connors, head of risk advisory at the Swiss bank.

Meanwhile, the broader market is accounting for less of the returns posted by publicly-listed US and European funds. That measure known as beta demonstrates managers have deliberately de-risked, according to data compiled by Bernstein.