Fed Sounds The Alarm On Overvalued Stocks, Hedge Fund Leverage, “Cov Lite”, And Junk

Friday, February 23, 2018
By Paul Martin

by Tyler Durden
Fri, 02/23/2018

Back in November we reported that when combing through the hedge fund Q3 13Fs, Goldman Sachs cautioned that even as smart money turnover had tumbled to all time lows, net hedge fund leverage – both net and gross – had hit all time highs.

Today, in its latest quarterly “hedge fund tracker” this time for Q4 Goldman doubled down (we will have more on the full report shortly), and made the same observation:

LEVERAGE: Hedge funds entered 2018 with near-record leverage and maintained risk despite the correction. Funds added nearly $20 billion of net exposure in two index ETFs alone (SPY and IWM) as ETF exposure rose to 3% of long portfolios. Although the S&P 500 suffered its first 10% decline in two years, funds maintained conviction in their positions. Portfolio turnover rose slightly but remained near recent record lows at 28%.

David Kostin then notes that while “net leverage dropped briefly during the correction”, Goldman’s Prime Services attribute the decline to mark-to-market dynamics in options positions, in other words hedge funds were not actively deleveraging, something Kostin confirms, stating that “both gross and net exposures currently remain close to recent highs.”

The Rest…HERE

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