By Natsuko Waki
LONDON, Dec 16 (Reuters) - Investors cut their bond holdings to their lowest level in two years this month while their equity allocation remained unchanged as investors looked ahead to 2010 with cautiously optimistic positioning, a survey showed.
According to the monthly fund managers survey from BofA Merrill Lynch, the net underweight position in bonds rose to 39 percent of their portfolios, levels not seen since December 2007, compared with 31 percent last month.
This means the difference between bond underweights and overweights is 39 percentage points. Just a year ago investors were a net 21 percent overweight in bonds.
Net equity overweight position remained unchanged at 37 percent, while overweight cash position ticked up to 6 percent this month from 5 percent in November.
"House keeping and window dressing are going on before the year-end but the key message is investors are going into 2010 in a pretty optimistic fashion -- they are optimistic on recovery, earnings," Gary Baker, European equity strategist at the bank, told a briefing on Wednesday.
"But it's not particularly euphoric. Risk appetite is still very constrained."
The survey, which polled 213 fund managers managing total of $617 billion, showed that investors forecast a 7.7 percent total return for global equities in 2010, led by the Asia Pacific region (9.1 percent) and global emerging markets (9 percent.).
Expectations or European stocks stand at 8.9 percent, while the UK is seen at 8.3 percent.
Laggards are forecast to be the United States, at 5.5 percent, and Japan, at 7.0 percent.
Hedge funds are coming back to the market, with their net exposure to equity markets -- measured as long minus short as percentage of capital -- jumped to 35 percent, its highest level since May.
The current ratio of their gross assets relative to the capital rose to 1.1 this month, compared with 0.96 in November.
A net 40 percent of investors viewed the dollar as undervalued in December, compared with just 1 percent in September. In contrast, a net 56 percent of investors saw the yen as overvalued, the highest reading ever.
(Editing by Ron Askew)