Over the weekend, we presented the latest BofA survey of credit managers, according to which there was a schizophrenic dichotomy: on one hand virtually everyone admitted there was a bond bubble…
… yet on the other, everyone continued piling into, you guessed it, bonds at a rate never seen before.
Irrational, central-bank induced “TINA” behavior notwithstanding, we were expecting that in BofA’s comprehensive Fund Managers Survey, a “credit bubble” would at least figure in one of the top spots among the biggest concerns by the active investing community. Oddly enough, that did not happen. Even odder, there was a new “biggest tail risk” among the active manager community, one which we are having difficulty grasping, especially since Europe has been particularly quiet in recent months.
As the latest FMS reveals, the biggest tail risk is no longer Renewed China Devaluation, as was the case in July, followed by “a crash in the European bond market.” Instead the biggest concern cited by some 22% of respondents in the month of August was “EU disintegration“, followed by China devaluation in second place with 18% of respondents, and US inflation progressively rising in third spot.
It is unclear why the EU is suddenly front and center in the list of concerns, unless of course “fund managers” are actually thinking several steps ahead and envisioning a Europe where, as a result of the recent surge in terrorist attacks, the customs union ultimately falls apart as a result of the surge in populist anger manifested most recently by the Brexit vote. If that is the case, Merkel should probably do everything in her power to make sure that Turkey’s Erdogan does not pull out of the March 2016 refugee deal as the last thing her plunging approval rating could sustain, is another million or so in Syrian “refugees.”
* * *
Risk aside, how are said managers reacting to these “tail risks”?
Not surprisingly, as the next chart shows, “Fewer managers are taking out protection against a sharp fall in equity markets in the next three months.”
Considering that short interest in the S&P has now fallen to 3 year lows, this is hardly surprising as most active investors, worred about market underperformance for yet another yet, rush head first into risk.
In a final “risk”related question aimed at hedge funds, namely “what is your net exposure to the equity markets”, the answer was “the highest since Aug’15.” As a reminder, August 2015 is when the market peaked last year and after China’s devaluation, proceeded to literally break on the 24th of the month after the infamous ETFlash crash, sending the VIX soaring.
via http://ift.tt/2bfbI4j Tyler Durden