How the smart money is playing the crisis

thenews 2013.10.11 09:21

The smart money doesn't think the U.S. will default on its debt.

Despite continued dire warnings from top officials like Treasury Secretary Jack Lew, many hedge funds and other large money managers aren't significantly trimming their portfolios—and some are even increasing their market exposure.

"Going into today we're short volatility and long risk as our view was there was little chance this would ever amount to a default," said the manager of a $1.5 billion macro hedge fund that is betting on the appreciation of stocks in the U.S., Europe and Japan.

"At these levels the risk-reward isn't as good for a trader but I would still remain basically long risk through this. All hedges will end up losing money, so if one wants to manage their risk they should just be smaller with an eye to assess when things shake out."

That relatively bullish view is common.

According to a recent Bank of America Merrill Lynch analysis of hedge fund client portfolios, stock-focused funds maintained market exposure at 38 percent net long, in line with averages. And funds that use macroeconomic views to invest increased their long exposure to major U.S. stock indexes—in addition to increasing their long positions in commodities, the U.S. dollar and 10-year Treasurys.

Only market-neutral hedge fund of funds reduced exposure to zero from 2 percent net long the week before, according to the report.

Fittingly, Kyle Bass of macro hedge fund firm Hayman Capital Management said he's not hedged for default because there's nothing investors can do about it.

"All the money you're gonna have is under your pillow,and it probably won't be worth as much as it is today," Bass said."But I don't think we're going to get to that apoplectic point in the U.S.," Bass told CNBC Wednesday.