CC Simple #2 - What Hedge Funds and Institutions Aren't Telling You
Institutional activity saying 'hasta la vista'.
Welcome to CC Simple #2.
Hedge funds seems to have decided their stance.
First I want to take the opportunity to say happy 13,190 views. After three months running, we have crossed the 10k mark, and I am grateful and humbled. Cheers guys.
When Twitter?
This is a premium CC Simple letter, which deserved a longer in depth take compared to the first CC Simple #1 letter.
Content; 3,811 words 25,097 characters, 8 charts
This is not financial advice, and you should always do your own due diligence.
Errors may occur.
Main introduction - CC Simple #2
Unlock Real-Time Insight: What Hedge Funds and Institutions Aren't Telling You
In this letter, we're pulling back the curtain on what the big players—institutions and hedge funds—have been up to throughout 2024. This isn’t your typical lagged data; this data is as real-time as it gets, offering you a privileged glimpse into capital flows from the beginning of the year and all the way up to the past week.
This edition of CC Simple is packed with premium insights, showing you the actual capital flows and positioning flows of institutions—not just for the recent weeks but throughout 2024. There’s been a consistent trend this year, one that’s intensified in recent months. It’s a shift that signals where institutions see the market headed next, and it’s one my readers may have seen coming after our coverage the past months. Remember I highlighted the shaky structure this summer? At the exact same time I highlighted contrarian investment philosophy, ideally, the institutions took notice—and acted on it.
But that’s just the beginning. This letter highlights components such as Magnificent 7 exposure, and dives into the sheer scale of overvaluation gripping the S&P 500 today, breaking down 20 critical metrics from Trailing PE, Forward Consensus PE, Shiller PE, EV/EBITDA, P/BV, P/FCF, ERP (Market-Based), S&P 500 vs. 10-Year Treasury Yield, S&P 500 Market Cap/GDP, Forward PEG and 10 more! Pure beauty. If you’re an investor who is new to these metrics, I’ll walk you through what these multiples mean in-short, providing metrics that spans a century of market data.
Get ready for a no-nonsense, data-driven look at today’s market landscape. If you’re serious about understanding the undercurrents shaping the market—and perhaps obtaining a clue learning how to prepare yourself for the potential shifts ahead—this letter is for you.
We will start with three introduction charts, before diving deeper.
First out, BofA institutional flows
Market Sell-off Led by Institutions: A Record Retreat
Before diving in to the deep analysis of this letter, the first striking data point underscores an intense wave of selling among institutional clients. Exhibit 3 reveals the second-largest weekly net sale by institutional clients in Bank of America’s data history, spanning back to 2010. This recent outflow signifies a sharp shift in sentiment, as institutional players—typically considered the "smart money"—scale back on equity exposure at an unprecedented rate. This move not only highlights a defensive pivot but might also serve as an early signal, especially for retail and individual investors who most likely do not have access to this type of data set.
The accompanying Exhibit 8 further inspect this event by client type, showing that, while hedge funds registered marginal inflows for the past week, institutional clients executed significant outflows in the last week of October. Institutional outflows far outweigh any inflows by other client groups, hinting at a broad de-risking strategy in response to heightened macroeconomic concerns, elevated valuations, and potential structural market vulnerabilities. With institutions pulling back aggressively, the market landscape appears fragile.
This institutional-led exodus sets the stage for a deeper look into institutional positioning, sector flows, and the valuation metrics while excluding macro for this letter — that have driven these decisions. Here you are only witnessing recent flows, further in to this letter you will obtain a full 2024 picture. As we explore this defensive stance in greater detail, it becomes evident that this is not merely a short-term repositioning but part of a larger, cautious shift across professional investors—a shift reflective of rising skepticism about the market's ability to sustain current levels amid economic headwinds.
Source; Goldman Sachs
Continuing the introduction, the third chart highlights the rapid decrease in hedge fund exposure to the Information Technology sector, with net exposure dropping in the fastest pace the past six years. The data suggests that hedge funds have sharply pivoted away from tech, reflecting an accelerated pace of de-risking or profit-taking in a sector that has recently driven much if not all of the market’s recent gains in light of the extreme 100yr concentration. The sell-off, especially evident in second latter of 2024, marks one of the steepest declines in tech exposure since 2019, signaling that hedge funds may be bracing for potential volatility, valuation concerns, or economic headwinds that could disproportionately impact tech stocks.
This shift aligns with the broader trend of defensive repositioning I will display to you in this letter, across institutional and hedge fund capital flows, indicating a strategic move to reduce exposure in sectors with high beta and elevated valuations. Hedge funds swift reduction in tech allocation underscores a shift toward risk aversion, particularly as macroeconomic uncertainties weigh heavily on growth-oriented sectors. This decline could be a harbinger of broader caution, given tech’s significant role in market performance and overall sentiment.
Now, as the introduction is through, lets dive into the deeper parts and analysis of this letter;
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