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)

Hedge Funds Underperformed Broader Markets in the Bear Rally

Hedge funds failed to take advantage of the sharp rally in equities in March as their generally defensive stance meant the average fund across all investment strategies gained less than 2 per cent even as the benchmark S&P 500 index rallied by more than 8 per cent.

Some hedge fund strategies completely missed the upside of the equity markets in what many analysts were describing as a bear market rally.

Many hedge funds have taken a step back from directional bets on the stock markets against the backdrop of the heightened volatility that has accompanied the financial crisis.

Many are under pressure for funding and have been subject to a wave of redemptions by investors. Some have invested large amounts in cash, while many multi-strategy funds have focused on opportunities beyond the equity markets, particularly in distressed debt and special situations.

According to figures from Hedge Fund Research, a weighted composite of hedge fund strategies rose 1.8 per cent in March. The S&P 500 rose 8.5 per cent over the same period while the Nasdaq Composite index rallied almost 11 per cent.

Many hedge funds posted negative returns for the month. For example, the HFR macro hedge fund index was down 1.2 per cent for the month. The best-performing hedge fund strategy groups were those focusing on energy and basic materials. But even these funds failed to the match the gains in the broader equity market, rising about 5 per cent for the month.

March began with a challenging week for equity markets in which the benchmark S&P reached a 12-year low and fell to 57 per cent below its October 2007 peak.

But positive news regarding the early-year revenues from Citigroup and other financial institutions sparked three weeks of sharp rallies in the leading US equity market indices.

These were accompanied by similarly powerful equity rallies across the globe and were given further momentum by positive revenue announcements from other troubled banks as well as the US government’s proposal to buy toxic assets from financial institutions and other upbeat indicators.

Long/short equity managers, the largest strategy group in the hedge fund business, displayed a wide dispersion in performance as many were defensively positioned going into the rally.

Their overall performance of 2.3 per cent was low as a result compared with the broader equity markets. Not surprisingly, the HFR dedicated short bias index was down 4.9 per cent for the month, after staging two strong months in January and February. Multi-strategy funds captured upside participation with a return of 1.6 per cent for the month.

(from FT, April 9, 2009)

Jim Chanos: Give Us a Seat at the Table

“New rules of the game” are necessary to restore confidence in the financial system after credit markets seized up and stocks fell the most since the Great Depression, Treasury Secretary Timothy Geithner said yesterday. He proposed requiring hedge funds and private-equity firms to register with the U.S. Securities and Exchange Commission and to disclose information about their holdings.

“The industry has been bracing for the call for regulation and within reasonable bounds accepts it,” Jim Chanos, founder of New York-based Kynikos Associates Ltd. and head of the Coalition of Private Investment Companies, a hedge-fund trade group, said in a Bloomberg Television interview. He stressed that, like banks, hedge funds want to be able to work with the congress on the adjustments in regulation - "give us a seat at the table."

Hedge funds and buyout firms would also fall under the purview of a new regulator that would identify companies deemed “systemically important,” or capable of wreaking havoc on financial markets. Officials would have the authority to seize these firms if they threatened the markets, much as they do now with insolvent banks.