For all the nervousness over Washington’s budget wrangling and the political crisis in Italy, hedge funds have rarely been more bullish on equities.
In the US as a whole, only 2.4 per cent of shares, close to an all-time low, are out on loan – a measure of short selling activity, says data provider Markit.
Only six companies have more than 3 per cent of their stock sold short. In Europe, it is only two.
With global stocks up 19 per cent so far this year, according to the MSCI world index, it is little wonder.
“In today’s prolonged bull market, it has been hard for short sellers to bet against a rising tide, much of which has been driven by macro-economic sentiment,” says Alex Brog, a director at Markit.
“The muted borrowed demand today is the new reality.”
According to HFR, the average equity hedge fund is up 7 per cent for 2013.
Although the figure compares favourably with other hedge fund strategies, which are up only 4.5 per cent this year, and with equity hedge funds’ recent lacklustre run of only 8 per cent in the entire preceeding three years, it hardly screams mastery of the universe.
However, the headline numbers do not tell the whole story.
“In a ripping bull market I wouldn’t expect hedge funds to keep up fully,” says Rick Teisch, US director of research at Liongate Capital, which has $2bn invested in hedge funds on behalf of clients.
“I’d expect them to capture some of the upside and to significantly limit the downside. And that’s what they have mostly done this year.”
In August, Mr Teisch notes, equity markets dropped dramatically, yet the average equity hedge fund did not, and many even made money.
“And there are plenty of equity hedge funds – particularly those with a long bias, concentrated portfolio of a focus on a particular theme – that have done really well this year,” he says.
“We have seen returns of as much as 30 or 35 per cent from some.”
For managers whose modus operandi is zero in on the fundamentals of corporate performance – old fashioned stock-picking – 2013 is proving to be a boom year.
For example, TCI
, the multi-billion equity hedge fund run by Chris Hohn has made its investors 34 per cent in the past nine months, according to a client, thanks to timely wagers on companies such as EADS
, which Mr Hohn has been pressing to dispose of its stake in Dassault Aviation.
, run by John Armitage, was up 23 per cent as of the end of August.
Big gainers for the firm have included Sky Deutschland
“Fundamentals are increasingly being rewarded,” says Ben Watson at Aberdeen Asset Management
“Even though there is still macro risk and negative headlines at every turn, the fundamentals are shining through and share prices are taking more account of them than there were in 2010 or 2011 or 2012. . . It’s a stockpickers’ market.”
Some of the most successul fundamental equity bets this year have been in financials – a sector hardly well-placed when it comes to swings in macro sentiment.
Algebris, the financials-focused fund run by Davide Serra, has made its investors 36 per cent so far this year in its equity fund, according to an investor. Mr Serra has also raised $100m in the past few weeks for a brand new long only fund targeted specifically at financial services companies.
, Europe’s biggest equity hedge fund, has also seen its bets on banks, which for a long time had dragged on the fund’s performance, finally come good.
The flagship Lansdowne developed markets fund is up 20 per cent so far this year.
, the hedge fund firm founded by former top-rated bank analyst Martin Hughes, has been another beneficiary of British banks’ rerating. The firm’s flagship financials fund, run by Johnny de la Hey, is up 17 per cent so far this year.
As for where future opportunities lie, equity managers of all stripes are now looking at Europe. Flows into European markets have been muted over the past few years and companies have traded at steep discounts thanks to fears over the eurozone debt crisis.
The situation is set to change, many hedge fund managers believe.
And, of those, a great number – particularly US firms – are now putting money behind their views. Demand for hedge fund office space and equity analysts in London has been rising fast this summer.