Fund managers have labelled bitcoin as the 'most crowded trade' in investment, as the crypto-currency's meteoric rise continues to attract headlines.
Bitcoin has surged 1,800% over the last 12 months against the dollar, breaking through the $10,000 milestone in November and threatening to hit $20,000 last week before falling back to just under $16,500.
Fund managers have largely been watching from the sidelines as the digital currency has exploded in popularity, although there have been some exceptions.
Legendary US fund manager Bill Miller holds around half of his MVP1 hedge fund in the currency, having bought the currency at an average price of $350 in 2014 and 2015, he said on a podcast last week.
Appetite for bitcoin hasn’t been dampened by high-level warnings from the likes of outgoing US Federal Reserve chair Janet Yellen who called it a ‘highly speculative asset’.
Nearly a third of fund managers responding to Bank of America Merrill Lynch's monthly global survey said bitcoin was the most crowded trade in investment.
The tech stocks collectively known as FAANGs (Facebook, Amazon, Apple, Netflix, Google) were the second most crowded trade alongside Chinese tech firms known as BAT (Baidu, Alibaba, and Tencent).
The survey also indicated a degree of profit-taking as markets continue to trade at all-time highs.
The average cash balance rose for the first time in four months to 4.7%, up from 4.4% in November, and back above the 10-year average of 4.5%.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, suggested this cash on the sidelines could help to drive markets higher when it is redeployed.
‘Despite surging credit and equity markets, investors increased their cash balance back into buy territory,' he said.
‘This paves the way for more risk asset upside in the beginning of 2018.’
Fund managers' biggest fear continues to be a policy mistake by the US Federal Reserve or the European Central Bank, with 23% of managers placing it at the top of the list. A crash in global bond markets and a Chinese debt crisis take second and third place respectively.
US tax reform is also on managers’ radar, with two-thirds expecting president Donald Trump’s plan to give businesses tax cuts to support stocks and hurt bonds next year.
A net 45% of managers believe equities are overvalued, a three-month high. However, they cannot agree when the market will peak next year, with a quarter believing it will be in the first quarter, 30% in the second and 28% in the second half of the year.
But that's dwarfed by the net 83% of managers who believe bond markets are overvalued, back close to the record high in October of 85%.
The UK continues to be out of favour and managers continue to prefer banks, technology, industrials, and insurance. They are avoiding consumer staples, telecoms, and utilities.