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 consensus — which is probably a good thing.
What are they thinking about? The health care bill, financial reform, the federal deficit, tax policy, 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 five 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%) but not excessive amounts. 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 (after the pullback reversed). They are a combination of Global Macro traders and Long/Short funds who hate this environment, along with Trend followers who don’t want to fight the tape. They are carrying too much cash — from 20% to as much as 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 hit the bid near year end, and took huge performance fees. 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 of 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.
There are caveats with this, of course — these are only rough numbers, and do not represent a true scientific poll. These are not a valid statistical sample, etc.
And, they are only my anecdotal guesstimates, based on friends, colleagues, clients, etc.
Thank you Barry! A very enlightening article for those of us who have no clue about what institutional investors think and do.
Wall Street is very forgiving if you are allowed to belong to category #5 and still have a job / money to manage. OK, the group is small, but I still don’t understand how you think if you totally missed the move from March until now. I assume these hedge funds won’t survive.
Barry, this may be a naive question, but to which group(s) do the people whose opinions and past performance you respect the most belong?
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BR: The trades that were right this time might not be next time using the same approaches.
So the guys whose work i respect are spread across all 5 buckets — I watch their methodologies, not necessarily the short term results (though its hard to ignore those).
Thanks for the synopsis BR.
There’s probably another section as well….those that followed Warren B.’s advice and bought stocks in Oct 2009….held long during the the last power pukefest and are now very happy to see their holdings “above water.”
I’m in group 4, am angry about not being in 1, and think group 5 is where I’ll eventually be.
Great post BR, it explains somewhat the vanishing volume, since all but 10% are committed longs and they are probably leveraged to the hilt by now.
Hussman would clearly be a three, seems like the place to be.
This is a good post.
I’d like to see more dimensions… fixed income vs equities, and then low risk versus high risk. Both the fixed-income and the equities “high risk” buckets did very well. With HY credit and other bonds paying 50-100% over the past year. A lot of the large institutional contacts I have were very focused on large allocations to HY/credit space 1-yr ago.
Still, its only logical that the crisis was a liquidation / raise cash event. Which means naturally large pools of risk aversion have been earning 0% on cash. Others have chosen to pay down debt — real estate, leverage, etc — and that has collapsed money creation some.
Gradually the recovery encourages less and less risk aversion (the grind). Also, in the next 2 quarters I think bank lending finally opens up again and starts to channel the Fed ZIRP into profitable investment projects — hedge fund leverage, real estate development, energy development projects, small business lending. Thus, the recovery accelerates.
I recent saw that Ed Hyman of ISI (best wall street macroeconomist ever?) agrees, saying the research they do shows the economy having a good Q1 and accelerating into Q2. He is predicting a “V-shaped” recovery. Even a Barron’s article came across my email last night — “Drop the Double Dip”.
Hi Barry, question is, in which camp are you in? I guess #1, right?
Not precisely: I have elements of 1 -3 and even 5
We got the bottom right, but did not use leverage.
I actually priced out SPX 750 and 800 Leaps last March (09) for a $10,000 flyer "“but that was during the final edit of Bailout Nation, and I got too distracted and never placed the order.
That trade would have netted about $5M had I followed up. (C'est la vie!)
Our managed accounts have a decent amount of cash "” too much in my opinion for now but that aspect might be redeemed later . . .
What about those that never sold, and just rode it out? I know several pros in this camp. These people are very infrequent traders.
SteveC, I suppose that would be the TRUE buy and hold folks, wouldn’t it? Anybody that bought before the big meltdown, stayed with it, and is still in it, is a firm believer in the “system”, and I don’t fault them for their accumen. Results speak for themselves.
That would usually be people with so much money that losing some isn’t a risk they feel uncomfortable with, or folks with so little money that they don’t know any different!
BR: I got a pop up box in the lower right-hand corner just now. The msg said “The Big Picture is conducting a survey to improve the quality of the site.” Is this true, or some 3rd party initiative not affiliated with TBP? Thanks.
Thanks for the answer Barry. I got the bottom right, and by mid March I was fully in and leveraged [got warnings from my broker], but I’m mostly in cash since last December. I guess that puts me in 4.
BR – I think there is a zero missing in your post above. 800 strike 1-yr LEAPs would’ve netted about $300 and cost about $6… for a 50x trade. Not a 500x trade.
i find it interesting to see to what extent one’s current position, among those you observe, is influenced by past performance. easier to be more constructive if you have played the past rise correctly, and vica versa. shouldn’t it be the reverse? more nervous with more house money, less nervous when one realizes that one has been playing a losing hand?
i know many buy and hold folks. they kept plowing money in believing in cost averaging, long term compounded gains. they also believe that they’re basically forced to participate in the market because they can’t possibly meet their retirement goals by sitting on the sidelines early less than inflation in the limited 401k options provided through their employer. basically they’re hoping they get the 6-8% annual returns else they’ll work until they’re dead. not a very thoughtful strategy.
Rikky — That strategy certainly worked in 2002, 2003 and the hard bottoms of 2008, 2009. (Oh, it also 10x worked in 1983, 84, 85, … 93, 94, 95…).
Dont forget also — stocks pay dividends. I find it funny when people say — “we’re flat since 2005…” Yeah, so the market has paid 2-3% since then. After taxes that WAY better than cash (or real estate?).
IF you bought equal amounts quarterly since the 2000 peak (awful timing!)… it looks like your “avg cost” on SPX would be 1,200. So you’d have just made the dividends. That’s not some horrible downside. (Investments DO have risk, you know?).
Barry, are you measuring this vs. the investors’ mandates? Obviously many managers can’t be in cash or are long only, etc..
For the record, I’m more in category 4, though dabble in category 3.
(have you noticed that when presented with categories, 90% of people will try to figure out which category they belong to, and 10% won’t?)
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