* Hedge funds reverse bets against stocks
* Funds fall far short of S&P gains in 2012 -Credit Suisse
* Hedge funds increase bets on volatile, higher-risk stocks
By Edward Krudy
NEW YORK, Sept 21 Many U.S. hedge funds that
have lagged the stock market rally in 2012 are now buying
riskier stocks and commodities - and using more borrowed money -
in an effort to play catch-up.
Funds have cut cash holdings and reversed broad bets against
the surging market. If the shift in the $2 trillion hedge fund
industry continues, it could drive asset prices even higher.
"We've been watching for months for signs of a catch-up in
risk and are at last starting to see it, as funds raise risk to
markets to lessen the risk of missing the markets," Philip
Vasan, global head of Credit Suisse's prime brokerage, told a
conference call of several hundred hedge fund clients and their
investors on Wednesday, according to a transcript of his remarks
provided to Reuters.
Through the end of August, hedge funds gained around 4.5
percent, according to Credit Suisse. By comparison, the total
return for the S&P 500 Index was 13.5 percent
through August, and 8.2 percent for the MSCI World Index
. Hedge funds focused on credit strategies have
been the best performers, with returns of more than 7 percent
Hedge funds started to become more aggressive over the
summer, in the run-up to a well-telegraphed move by the U.S.
Federal Reserve to pump stimulus into the U.S. economy and as
the European Central Bank stepped up efforts to reverse the debt
crisis in the euro zone.
So far, 2012 has been a year that has flummoxed many
seasoned market-watchers. They feared a repeat of 2011, when
markets sold off sharply on concerns the euro zone would
collapse, sparking a massive financial crisis and a deep global
But as of Friday's close, the S&P 500 has rallied 16 percent
since the start of the year, and many emerging markets and
developed European markets have seen dramatic reversals of
fortune over the summer. About 7 percent of the S&P's gains have
come since early August.
Hedge fund exposure to higher-risk, volatile stocks that
tend to exaggerate market moves - such as financials and small
caps - has reached levels not seen since the spring. Holdings in
those so-called high beta stocks rose 40 percent in August and
such stocks now represent nearly a third of funds' net U.S.
exposure, according to Credit Suisse.
Leverage has increased modestly, hitting 2.6 times capital
after remaining around 2.5 times during the summer, according to
Vasan. That is still far below levels seen prior to the 2008
financial crisis. In a sign of some bullishness, hedge funds
have moved more money out of cash, with the excess cash level
falling below 21 percent for the first time since the spring.
More hedge funds are long the market than in the summer, as
the long-short ratio is up to 38 percent after slumping to 25
percent over the summer. This indicates that more investors are
betting that the U.S. stock market will continue to rise.
The repositioning has borne fruit. Long-short funds captured
two-thirds of the MSCI World Index's gains in August, compared
with 7 percent in June. Returns for long-short equity funds
climbed steadily, hitting 3.2 percent in the middle of September
from below 0.3 percent in June.
Credit Suisse prime brokerage serves about 400 hedge fund
clients that range in size from $100 million to several billion
dollars. The firm estimates that monthly prime brokerage client
calls represent about a third of the industry's $2 trillion in
BOTH FEET IN WATER
Performance at equity hedge funds has started to accelerate.
In August equity-focused funds gained 1 percent compared with
0.5 percent across the whole industry, according to data from
Research eVestment Alliance. It was the third consecutive
monthly gain, they said.
Greenlight Capital Offshore, a mid- and small-cap hedge fund
run by David Einhorn, is one of the best-performing funds this
year. It gained 4.1 percent in August and was up 10.4 percent in
the first eight months of the year, according to a weekly hedge
fund review by HSBC.
Despite early signs of greater conviction on the part of
hedge fund managers, flows into hedge funds - money that
investors are putting to work in the area - have still not seen
a significant pick-up, said Vasan.
Through the three months ending in July - the latest period
for which data is available, $16.8 billion flowed out of hedge
funds, according to Research eVestment Alliance.
But Vasan said he is seeing an uptick in enquiries from
investors about investing in hedge funds. They are also seeing
strong enquiries at the firm's capital services team, which
raises money for hedge fund clients from investors such as
family offices, endowments, and insurance companies.
"Although not yet reflected in significant flows, investors
continue to do a great deal of advance work this month, to be
prepared to allocate when they identify a catalyst for writing
the check," Vasan said on the conference call.
"We've considered today a change in risk stance that is very
much an extension of what was under way - from a toe in the
water, to a foot, to both feet - with central bank intervention
the catalyst," he said. "We'll see if this has legs, and if so
how investors follow."