Waiting for the Next Inflection Point

What are the pros doing? 

I’ve been speaking with various institutional investors, and I can tell you there is little in the way of uniformity of thought. Here we are, up 70% or so from the lows of over a year ago, and there is no uniformity of thought — which is probably a good thing.

What are they thinking about? The health care bill, financial reform, the federal deficit, a bubble in china, hyper-inflation, structural unemployment, another lost decade, and even demographics, their concerns are many and varied.

Their investment postures are even more varied. I can oversimplify them into one of 5 buckets

1) All In: They caught the bottom, or jumped in not much after it. They have been long and strong the whole run. They see no end in sight. Some are leveraged, some used options. My estimate: About 10% of pros fall into this camp.

2) Not-Too-Late: They joined the party later in the rally, and are still carrying some cash (10-20%). They are not sure why we have been going higher, but feel they must participate. (About 20% of pros)

3) Reluctantly, Partially Invested: The group that originally fought the rally, but honored their stop loss discipline to flip from short to long around June of last year. They are a combination of Global Macro and Long/Short funds who hate this environment and Trend followers who don’t want to fight the tape. They are carrying too much cash — about 20-50%. Many are looking for the next opportunity to get short. (About 30%)

4) Bought It, Sold It, Waiting for Clarity: This group had a very good 2009, but did not want to overstay their welcome. They moved aggressively to cash –  50%+ — and have dabbled on the short side. They are waiting for the next inflection point to redeploy capital in either direction. (~20%)

5) Missed it Totally, Waiting for Vindication:  The “structural economic problems” and “Unconscionable Federal Reserve actions” have kept this group out of the markets. They are awaiting the next leg down, a retest opf the lows, and then a break even lower. They are well stocked with Puts, bottled water, and MREs. This was a bigger cohort, but investor pressure and stress have reduced their numbers.  (Down to less than 5% of hedge funds)

That’s about 85%, as there are others who simply don’t fall neatly into one of these buckets.

Originally published at The Big Picture and reproduced here with the author’s permission.
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