How the smart money is playing the crisis

Jes Staley
Adam Jeffery | CNBC
Jes Staley

The smart money doesn't think the U.S. will default on its debt.

Despite continued dire warnings from top officials like Treasury Secretary Jack Lew, many hedge funds and other large money managers aren't significantly trimming their portfolios—and some are even increasing their market exposure.

"Going into today we're short volatility and long risk as our view was there was little chance this would ever amount to a default," said the manager of a $1.5 billion macro hedge fund that is betting on the appreciation of stocks in the U.S., Europe and Japan.

"At these levels the risk-reward isn't as good for a trader but I would still remain basically long risk through this. All hedges will end up losing money, so if one wants to manage their risk they should just be smaller with an eye to assess when things shake out."

(Read more: Prioritization of US payments dangerous: Treasury's Lew)

That relatively bullish view is common.

According to a recent Bank of America Merrill Lynch analysis of hedge fund client portfolios, stock-focused funds maintained market exposure at 38 percent net long, in line with averages. And funds that use macroeconomic views to invest increased their long exposure to major U.S. stock indexes—in addition to increasing their long positions in commodities, the U.S. dollar and 10-year Treasurys.

Only market-neutral hedge fund of funds reduced exposure to zero from 2 percent net long the week before, according to the report.

Fittingly, Kyle Bass of macro hedge fund firm Hayman Capital Management said he's not hedged for default because there's nothing investors can do about it.

"All the money you're gonna have is under your pillow,and it probably won't be worth as much as it is today," Bass said."But I don't think we're going to get to that apoplectic point in the U.S.," Bass told CNBC Wednesday.

Patrick Wolff, chief investment officer at $200 million hedge fund firm Grandmaster Capital, agreed.

"We have followed the political crisis closely. It has never risen above a yellow alert in our estimation. The risk of a catastrophic outcome seems to be diminishing now, but it's not over yet," he said.

Wolff, who focuses on stock picking, said he did very little in his portfolio around the government shutdown or the possibility of default.

(Read more: People who sold last Nov.-Dec. regret it: GoldenTree founder)

Scott Clemons, the chief investment strategist at wealth manager Brown Brothers Harriman, said he also wasn't counseling his wealthy clients to go to cash.

"We're not explicitly hedging our clients' portfolios in advance of a potential default, largely because we don't believe one will happen, but also because we believe that any impact of a short term technical default would be psychological rather than real," Clemons said . "That is, prices of securities may take a hit, but the underlying values won't."

A few are tweaking their portfolios just in case.

Jes Staley, a former JPMorgan Chase executive and now managing partner at $17 billion hedge fund firm BlueMountain Capital Management, told CNBC Thursday that his firm has been investing in options rather than underlying securities—thereby limiting both profits and losses in the event of a violent market move.

"In a world where there's calamity it's very hard to bet on direction," Staley said.

Clayton DeGiacinto, the manager of $2 billion structured credit-focused hedge fund firm Axonic Capital, said he had put on a low-cost high-reward hedge just in case.

"We see the probability of an actual missing of payments as extremely unlikely and difficult to hedge. That said, we've maintained a tail-risk hedge position which tend to pay off during exogenous economic shocks," DeGiacinto said.

(Read more: ExJPM exec Staley: don't worry about 'calamitous' default)

One potential crack in the market is Treasury bills.

Fidelity Investments' portfolio managers have recently sold government debt holdings that come due in the next few months—around the time of a potential default. But not everyone agreed with Fidelity's caution.

"We're doing exactly the opposite actually…probably buying what Fidelity is selling," said PIMCO founder Bill Gross on CNBC Wednesday.

(Read more: Bill Gross: We're buying what Fidelity is selling)

"The market has to respond to supply and demand flows, and that's putting pressure on short maturity bills," explained John Brynjolfsson, chief investment officer of $1 billion hedge fund firm Armored Wolf. "With Treasury interest amounting to just 10 percent of monthly tax receipts, there is plenty of coverage for Bills, Social Security, and Medicaid; and a phone call to the Fed is all the computer programming required to process those payments. The politics, however, is more complicated."

So far, the optimistic smart money has been, well, smart: the stock market had one of its best days of the year Thursday on a possible Congressional deal to temporarily extended the debt ceiling.

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.