Hedge funds were the most optimistic on equities in more than five years in the lead-up to the U.S. presidential election as global growth expectations climbed to an 18-month high, a Bank of America Corp. survey showed.
Hedge-fund net exposure to stocks rose to 40 percent, the highest since June 2007, according to a survey of global asset managers completed two days after U.S. President Barack Obama was re-elected on Nov. 6. Total holdings in equities for the respondents, who together oversee $568 billion, increased to a 16-month high.
“One big message from the survey is global growth expectations have rebounded,” John Bilton, European investment strategist at Bank of America’s Merrill Lynch unit, said at a press conference in London. Investors are “constructive on equities, but the survey reinforces there is room for a bit of near-term caution, particularly on the U.S.”
The Standard & Poor’s 500 Index has dropped 3.4 percent since Obama won the election as concern grew that impending U.S. tax increases and spending cuts, known as the fiscal cliff, will send the economy back into a recession. The Stoxx Europe 600 Index has lost 2.3 percent in the same period and the MSCI Asia Pacific Index is down 2 percent.
Bank of America warned that when hedge funds’ net equity holdings exceed 35 percent, the S&P 500 tends to fall 4 to 5 percent and underperform 10-year U.S. Treasuries by 7 percentage points in the subsequent four weeks.
“It’s a very short-term tactical signal,” Bilton said at the press conference. “There may be a little bit of capping in equity upside in the near term until we get to more of a conclusion in terms of where the fiscal cliff takes us.”
Even so, a net 35 percent of global fund managers said they were overweight equities in November, meaning they now own more of the asset class than is represented in benchmark indexes. That’s up from 24 percent the previous month.
The MSCI All-Country World Index has climbed 11 percent form this year’s low on June 4 as the European Central Bank approved an unlimited bond-buying program and the Federal Reserve started a third round of asset purchases.
Some 35 percent more respondents saw the global economy expanding than contracting, up from 20 percent the previous month, and optimism on Chinese growth soared to a net 51 percent from 5 percent. Risk appetite also improved, with the greatest number of investors taking on higher-than-normal risk in their portfolios since April 2011, according to the survey.
Allocation to bonds plunged to the lowest level in seven months while holdings in real estate were “extremely overweight” relative to history, the report said.
Optimism on emerging markets surged to an eight-month high with a net 37 percent overweight the region’s equities from 32 percent in October.
Money managers added to their U.S. stock holdings, with a net 11 percent overweight the region in November, versus 10 percent the previous month. They reduced their holdings in Europe to 1 percent overweight from 10 percent and grew more bearish on the U.K., with a net 15 percent now underweight the market versus 6 percent in October.
The global survey, which included 186 people, was conducted from Nov. 2 to Nov. 8. Most participants completed the survey prior the U.S. election result, Bank of America said.
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