Some insights into hedge fund positioning by John Trieste, portfolio manager of 1OAK Liquid Alternative Beta.
1OAK LAB is a model-driven portfolio that derives its allocation from estimates of hedge fund positioning. Put simply, we use hedge fund indices to track the performance of a very large group of hedge funds, and from there implement statistical techniques to identify a portfolio which can reproduce the returns of hedge funds in aggregate.
As such, our model provides a window through which we can make inferences about the general positioning of the hedge fund community. Here is some insight into the trades LAB has made this month.
At the beginning of the month, LAB was long medium-dated government bonds (specifically 10-year Canadian bonds) and short long-dated government bonds (15 to 25-year US Treasuries). This was reflective of a “steepener” trade and a bet against longer-duration assets. It is possible that many hedge funds had initiated this trade in order to benefit from the market’s reassessment of future inflation risks and correspondent Fed policy. The short leg of this trade paid off well for LAB and helped diminish loses arising from its predominately long bond position.
More recently, LAB has removed all short positions on bonds and is now simply long 10-year bonds. This likely reflects the view amongst the hedge fund community that the sell-off on the long end has run its course, and there may well be flows into fixed income as institutional investors rebalance at the end of the quarter. Incidentally, LAB’s timing for its short trade was very strong — we removed the short position in bonds on March 17th and 30-year yields peaked the day after.
In our end-February comment, we reported that LAB was long US equities across the market cap spectrum, with long positions in S&P 500 and Russel 2000 futures. LAB also held positions in the FTSE 100 and Hang Seng and was short German equities (DAX futures). This positioning has remained largely unchanged, with the notable exception of the DAX position, which was removed early in the month. This is suggestive that hedge funds have moved to a more neutral outlook for their equity exposure.