WHEN THE PADDY WAGON COMES

You've no doubt heard of passive-aggressive behavior.

You might like us even know someone. If you do we hope she's your ex-girlfriend like ours.

Well, don't look now but that pretty much describes investor behavior lately, according  to studies by Goldman Sachs and Morningstar, the big mutual fund tracker.

As fears about junk bonds grow investors appear to be leaving behind their more aggressive behavior and heading into more passive funds once popularly known as balanced. Balanced funds under the old term used to hold a certain percent of equities and a certain percent of fixed income securities.

The fixed income portion holds down the beta or volatility giving  investors a feeling of calm as they worry about huge swings in equities. 

Rest assured whatever Wall Street calls them, and they will usually respond with some eye-catching, money-fetching name, they are essentially balanced funds. Right now they're tossing around the term multi assets which is in some ways a ringer for diversification.

Everyone knows cash yields nothing these days and one thing Wall Street hates more than regulations is hoards of investors sitting on cash.Yet cash is in all probably the one place investors should be sitting given this market's run-up.

Buying junk bonds with spreads as narrow as they are was indeed aggressive. This move is suppose to be passive. It's also a statement, some are claiming, about active management or so-called alpha. Alpha in brief is that extra oomph professional active management is suppose to add to investor gains. 

If you follow the hedge fund world you realize one of the burning questions making the rounds these days is: Who took the alpha out of hedge funds? 

Investor activity like this can be directly traced to the Fed and its ZIRP nonsense for the past several years. If  there's an explosion--and the odds grow daily there will be one--these multi asset funds will take a hit too.

And the surprise here given a rising interest rate scenario greater than expected could be just how big a hit the bond portion might take.   

There's an old saying about prostitution and parties. When the paddy wagon comes it doesn't discriminate. It takes the good girls along with the bad ones downtown.

Like it or no, this is another way of saying you're judged by the company you keep. In our view investors would be sage here to fade the bureaucrats.