My Answer

I have been asked many times in the past few weeks why I concentrate on the fact that large investors, especially of a hedge fund kind, are underinvested? After all, they have been underinvested for a while and the market has not been able to make much headway.

The first thing that one must understand is that even the so called smartest investors in the world are illogical. Higher prices turn people bullish even if little has changed fundamentally. At some point these larger players will be forced to chase the market. Being underweight ones benchmark feels like being short when the market is rising and the easiest way to make the pain stop is to buy.

I don't know where this magical level is that will force these large investors to capitulate and buy but I know its there. I have seen it time and time again. I don't know if we will reach that level but the risk that we will is out there. When large market participants are bullish, like they were early this year, this upside risk does not exist because they are already overweight equities. For this reason I have no desire to go to a net short posture even if we were to get overbought and see a little too much bullishness. At most I would be willing to go to a neutral stance.

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