UBS issues a warning as CTAs have more than tripled their equity exposure in July

Investing.com -- Trend-following funds known as CTAs have “more than tripled their equity exposure in July,” UBS warned on Monday, pushing their positioning close to maximum long levels at a time when markets appear stretched.

According to the bank, CTAs are now “max long when markets are starting to be toppish,” which may embolden equity bears expecting systematic selling.

“With no room to buy, we should expect CTAs to reduce exposure from here, but only gradually,” UBS strategists led by Nicolas Le Roux said in a note.

They estimate potential near-term outflows of $10–20 billion over the next two weeks, citing supportive base effects and low realized volatility that should delay or dampen the unwinding process.

Per the report, CTAs have now reached the 92nd percentile of their 30-year equity exposure distribution.

In a downside scenario, this could translate into as much as $80–90 billion in outflows, compared with only $30–35 billion in inflows under a strong market rally. However, these figures are “relatively low vs. historical standard,” suggesting that systematic flows may remain subdued for now.

Beyond equities, CTAs continued to adjust positions across other asset classes. In credit, they are collecting carry in a low-volatility environment despite spreads approaching 2007 lows.

In foreign exchange, the July rebound in the dollar inflicted significant losses, prompting CTAs to buy back $50–60 billion of short positions—around a third of their initial U.S. dollar (USD) exposure. UBS expects further USD buying to bring CTA positioning closer to neutral by late August.

In commodities, positioning remains polarized, with CTAs very long metals and energy, and very short agriculturals. UBS anticipates modest profit-taking in both legs and “a massive rotation away from copper.

The firm’s current signal readings show CTAs are broadly bullish on equities, credit and precious metals, while maintaining bearish stances on bonds, the dollar, and agricultural commodities.