Hedge funds have opened the biggest short position on the S&P500 since December 2008

Hedge funds held a net short position of 71,980 short contracts at August 16, according to a monthly report on global asset allocation from Societe Generale, which looks at positions reported to the Commodity Futures Trading Commission. This is the biggest figure seen since December 2008, three months after the collapse of Lehman Brothers, when hedge funds held a net short position of 85,984 short positions.

Alain Bokobza, head of global asset allocation at Societe Generale, and one of the authors of the report, told Financial News: “Active market participants have switched to a massive net short. They have reacted very strongly to the recent economic and political newsflow. It’s a very important figure. It indicates just how pessimistic hedge funds are.”

Bokobza said that there’s a correlation between hedge funds opening the net short position and the S&P500 falling. "They have been partly initiating the fall by opening the net short.”

The S&P500 was trading at 1,192.76 on August 16 and fell to a low of about 1,121.45 on Tuesday.

According to CFTC data, the number of net short contracts hit a high of 127,474 in early September 2007, at the peak of the sub-prime housing crisis. Hedge funds currently account for 14% of total open interest on the S&P500, according to the CFTC.

US markets are poised to digest several events later this week. The Kansas City Federal Reserve’s survey - a regional manufacturing report - will be released tomorrow; a second reading on second-quarter GDP is scheduled for release on Friday; also on Friday, Federal Reserve Chairman Ben Bernanke will speak on the direction of the US economy at an annual conference in Jackson Hol, hosted by the Kansas City Fed; and the final reading of the Reuters/University of Michigan Consumer Sentiment Index is due.

Bokobza said that hedge fund reaction to this newsflow may have an impact on the S&P500. He said: “At some point they will have to take profits and cover their shorts. Technically this will be a bullish indication for equities."

Hedge funds continue to hold a long position in gold, according to the Societe Generale report.

(Financial News, August 24, 2011)

Marc Faber: Gold won't fall below $1000 level ever again

Warren Buffett: "The [US] economy will be in shambles throughout 2009 – and probably well beyond."

Berkshire Hathaway lost $10.9bn, out of which $4.61bn pre-tax losses on derivatives.

By Richard Tyler, Telegraph, 28 February 2009

Billionaire Warren Buffett, the Sage of Omaha, has recorded his worst financial performance since taking over famed US investment group Berkshire Hathaway in 1965.

The group's net worth dropped by $10.9bn (£7.6bn) in the final quarter of 2008 to end the year at $109.2bn.

His investments and broad mix of insurance, utility, manufacturing and services businesses barely broke even, with quarterly net income sinking 96pc to $117m.

In his annual letter to shareholders, released yesterday, Mr Buffett pointed the finger at $4.61bn of pre-tax losses booked on falls in the market value of 251 derivative contracts that he had personally approved. These included 15-20 year bets that the FTSE 100 and S&P 500 would recover all their recent losses.

Mr Buffett described derivatives as "dangerous", but he remained convinced that they were a good bet. "I believe each contract we own was mispriced at inception, sometimes dramatically so. If we lose money on our derivatives, it will be my fault," he wrote.

Nineteen of top 20 stocks in Berkshire's US portfolio, valued at $51.9bn, fell last year. Coca-Cola, its top holding, dropped 26pc and American Express plunged 64pc.

Mr Buffett, 78, said he would maintain Berkshire's "Gibraltar-like financial position" during 2009 by retaining "huge amounts of excess liquidity, near-term obligations that are modest and dozens of sources of earnings".

But he offered a gloomy outlook, saying: "The [US] economy will be in shambles throughout 2009 – and probably well beyond."

He also upped his attack of the US government's bail-out of his insurance and banking rivals. "Though Berkshire's credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing," he wrote. "At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."

He said he would continue to buy shares and bonds from companies. "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," he quipped. However, he hinted that his focus this year would be in snapping up companies at bargain prices that had the potential for solid earnings growth in the future. "We like buying underpriced securities, but we like buying fairly-priced operating businesses even more," he wrote.

Despite his near-mythical status, Mr Buffett readily admitted that he was fallible. "During 2008 I did some dumb things in investments," he said, pointing to his decision to increase the fund's stake in oil and gas giant ConocoPhillips at peak prices as he did not anticipate the dramatic fall in energy prices in the second half of the year. It cost Berkshire shareholders several billion dollars.

Berkshire Class A shares closed on Friday at $78,600 (£55,138) and have fallen 44pc since the end of February 2008. Over the last 44 years, the value of Berkshire's net assets has rocketed from $19 to $70,530 a share, a growth rate of 20.3pc compounded annually.