According to Hedge Fund Research the average hedge fund returned 0.5% in August, while the S&P 500 returned 2.3% and the Russell 2000 returned 3.3%. It is difficult to conclude that hedge funds have high stock market exposure given the amount they lagged the major indices in August. Hedge funds can ill afford to continue to miss the rally as they are lagging the S&P 500 for the year by a wide margin. For the year the average hedge fund is up 2.23% through August while the S&P 500 is up over 13%.
The sentiment indicators I follow are just shy of extreme bullishness. One last rally that sucks in the hedge funds and pushes the sentiment indicators into extreme territory would likely lead to a meaty correction. However, if the market declines now hedge funds would likely use the weakness to increase their exposure and I don't believe it would go very far.
There is an undeniable profit slowdown occurring as we are seeing profit warnings on a daily basis, with Fedex being the latest. With valuations being in the realm of normal and the possibility a profit slowdown the risk/reward in the market does not seem great. I continue to wait for market participants to push this market to one extreme or another before I take a strong stance.