BofAML: Leverage Approaches 2007 Levels

BofAML: Leverage Approaches 2007 Levels

Mar 5 2013 | 3:07pm ET

Leverage, as measured by NYSE Margin Debt data, was up 31.6% on the year in January and 10.2% on the month to $364 billion, approaching the July 2007 peak of $381 billion.

Excessive cash draw-down has led to a contrarian sell signal, according to the latest Hedge Fund Monitor from Bank of America Merrill Lynch.

Net free credits (essentially, cash levels in margin accounts) were at a negative $77.2 million for January, according to BofAML analyst Mary Ann Bartels.

“Leverage can be used as a sentiment indicator because it  is related to investor confidence. It tends to be correlated to the direction of the equity market—investors are likely to gain confidence and add leverage when the equity market is going up and vice versa,” said Bartels.

“Current readings indicate that investors are becoming more confident in the equity market, which generally supports  further upside. Just short term levels have gotten a bit ahead of themselves with  cash levels now drawn down to levels which typically result in market correction.”

Against this backdrop, hedge funds continued to underperform the S&P 500. The investable hedge fund composite index was up 0.33% for February as of February 27, compared to a price return of 1.19% for the S&P 500.

Convertible arbitrage funds were the best performers for the month, adding 1.23%. CTA advisors were the worst, losing 0.55%  for the same period.

Bartels said their models indicate market neutral funds bought market exposure to 1% net long from 4% net short while equity long/short funds held market exposure steady at 33% net long, just below the 35-40% benchmark. Macros aggressively bought the S&P 500, NASDAQ 100 and10-year Treasuries; sold commodities; and added to their shorts in U.S. dollars. They also added to their EM and EAFE shorts.

Data from the Commodity Futures Trading Commission showed large speculators sold NASDAQ 100 futures, were flat the S&P 500 and bought the Russell 2000.

Large agriculture speculators bought soybean, sold corn and added to their shorts in wheat while metals speculators bought gold, sold silver and copper, slightly sold platinum and were flat palladium. Energy specs sold crude oil, heating oil and gasoline but remained flat natural gas.

Forex speculators sold the euro, bought the dollar and were essentially flat the yen. Interest rate specs aggressively bought 10- and 2-year Treasuries while remaining essentially flat 30-year Treasuries.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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