Hedge Funds Are Playing Defense on All Fronts

“The smart money is really uncertain,” says Bridgewater alum Bob Elliott.

Illustration by II

Illustration by II

Hedge funds are in risk-off mode as macroeconomic risks continue to mount.

That’s reflected in their unusually low exposure to stocks and bonds. Only 34 percent of hedge fund assets are invested in equities as of last week, compared to an average stock allocation of 50 percent over the last 25 years, according to data from asset management firm Unlimited, co-founded by Bob Elliott, a veteran of Bridgewater Associates. The firm, which was launched in February, now runs the Unlimited HFND Multi-Strategy Return Tracker, a hedge fund replication exchange-traded fund.

Unlimited, whose research is a byproduct of its hedge fund replication process, also found that hedge funds in aggregate had no net exposure to bonds, while the long-term average stands at 22 percent.

Even within stocks, hedge funds are avoiding riskier bets such as growth and emerging markets. Only 5 percent of hedge fund assets are invested in growth equities as of last week, significantly lower than the 15 percent long-term average, according to Unlimited. Six percent of hedge funds assets are invested in emerging markets, compared to the long-term average of 11 percent. In contrast, hedge funds are tilting to value stocks, which now make up 10 percent of assets. Hedge funds typically have 7 percent in value.

“It’s really interesting to see how the sophisticated managers are positioning, frankly,” said Elliott. “[It’s] quite conservatively.” Hedge funds are also using less borrowed money. “They are running some of the lowest leverage that they’ve run in their books over the last 25 years.”


Using machine learning techniques, Unlimited is able to determine funds’ positions in aggregate. It then cheaply copies these big trades for its own replication portfolio, which includes, among other strategies, the return profiles of global macro, fixed income arbitrage, and equity long/short.

Hedge funds are sitting on a large amount of cash, which has proved to be a good asset in the current environment, according to Elliott. “You get a pretty good yield on it, and you don’t have to take the duration or equity market risks that you would [have] if you invest in stocks and bonds,” he said. He added that funds have also been increasing their long positions in commodities and gold, which is unusual because these assets don’t tend to attract much attention from hedge funds in a typical year.

Elliott said he started observing hedge funds becoming more conservative in late 2021, when the Federal Reserve signaled that they would engage in consecutive rate hikes in 2022. In the second half of this year, the adoption of conservative investment strategies has accelerated amid rising fears of a recession.

“There’s a lot more ambiguity on a forward-looking basis than even we had at the beginning of the year,” Elliott concluded. “The smart money is really uncertain.”