HEDGE FUND CONSENSUS (Positive Consensus/Bear Market Indicator): Go Long!

December 23, 2014

Large funds that speculate on market direction have more at risk in the stock market than at any other time in the last year, according to the mid-December Commodities Future Trading Commission data of S&P 500 index contracts. Some other notable trends:

  • Hedge funds that focus on stocks are also 36 percent net long which in line with benchmark levels of 35-40 percent.
  • Macro hedge funds which bet on broad macroeconomic trends were increasing their exposure to long positions on the S&P 500 and Nasdaq.

According to the report, “Technicals are bullish and longs (i.e. bets that market will go up) may increase further.”

A couple of elements are in play. First is the continued low interest rate policy by Central Banks is propelling stocks to daily all-time highs. (As we write, the Dow Jones Industrials is crossing the 18,000 level). As long as rates remain low, yield will be hard to come by except in stocks. Second has been the meagre performance of hedge funds in 2014. The Absolute Return U.S. Equity Index which tracks managers who invest in stocks, is up only 3.74 percent year-to-date compared to the S&P 500 index which has been up almost 12 percent in the same period. Hedge Funds are essentially doubling down to make up for lost return. They are doing so in a backdrop of Club Fed who is showing no desire to increase interest rates in the future despite a US economy that is posting  5% GDP rates and unemployment levels not seen in the last 6 years.  These elements show appear to becoming a broken record and as long Club Fed keeps playing the beats the party will continue.