Usually, when a large investment or hedge fund has large cash positions open, it is preparing for a big move or acquisition that will start a trend in the market. But what happens when most hedge funds are stocking up on cash? Why is this happening at the moment, and what should we look for?
2016 has started in a sea of uncertainty, portfolio losses and plummeting prices. Currencies and commodities which were once considered safe havens, like the U.S. Dollar of Swiss Franc are very volatile and prone to serious issues in the near future. Combine this with bad performances for emerging market bonds, geopolitical issues and drops in oil and commodity prices, and you have the picture of 2016 all set.
Funds are bulking up on cash defenses not because they’re preparing for better trades, but because they are preparing for the worst. The entire investment crowd currently has only a few trades everyone agrees upon: Long U.S. Dollar, sell oil any chance you get and try to gather a well-balanced portfolio of emerging market stocks and bonds. These are the only clear positions available in the market, but they also come with certain risks.
The U.S. economic data is not as good as you might expect, and the Fed might postpone raising the main interest rate to later this year. Combine this with the uncertainty brought by Presidential elections, and the U.S. Dollar doesn’t look so good for the future. Combine this situation with the Brexit issue and the European refugee crisis, as well as Asian markets prone to heavier and heavier losses, and the world seems like a place without any safe investment.
All this data leads large funds to bulk up on cash reserve. They need liquidity for the moment when the markets decide where to go – either to keep investing in the correct direction or start short selling to cover losses and positions. All in all, bulking up on cash is a good idea. Maybe private investors should also have a go at it.