Hedge funds unwind

Macro/CTA funds had their largest drawdown on Monday since August 2007 as risk assets collapsed and the euro rallied, accordiing to Barclays research note to its clients. With markets in flux after the Greece-induced shock, the composite equity positioning measure is at the highest level since early December 2014. On the other hand, bond positioning is a bit cleaner. 

Exposure to euro area equities is still underweight, helping to support the rally today on Greek headlines. However, trust has been eroded and the July 5 referendum is likely to proceed. Although recent developments may favor a 'yes' vote and could lead to a relief rally in global equities, the potential for ongoing political uncertainty in Greece combined with extended positioning could see a more moderate move than some are expecting.

A "no" vote could lead to a large selloff . Extended equity positioning is an overhang near term, but fundamentals and fund flows are the key to sustained performance; both should be supportive of equities in Q3. 

Equity fund positioning in aggregate is now 1.1std above average. When composite beta was at least 1.0 stdev above average, global equities declined 2% over the next month on average.

Bond positioning is cleaner but bond redemptions are an overhang. 82% of US diversified bond funds underperformed the benchmark on Monday, suggesting cash levels are high after the April-May bond selloff. However, risk exposures at bond funds and relative value HFs ticked higher recently.

Fund flows are at an inflection point, added the note. There is a $200bn fund flow underweight in equities and the recent turn up in rates points to better relative equity inflows. Since the rise in rates, bond funds have had outflows of $20bn in the past three weeks compared with equity inflows of $15bn the past two weeks. However, the pickup in volatility could put the nascent trend at risk. Continued equity inflows are critical to facilitate a more orderly de-risking as new money enters the asset class.