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Hedge Funds Increase Bets on Bear Market This Fall

Tuesday, 6 Sep 2011 | 5:02 PM ET

Bearishness among hedge funds is surging as they increase their bets that stocks will continue to drop, pushing the S&P 500 into bear market territory this fall.

CNBC.com

Negative sentiment among hedge funds jumped to 42 percent from 27 percent, the highest level in a year, according to the TrimTabs/BarclayHedge monthly survey. About 27 percent are outright bullish, the lowest level since April 2011, the month the stock market set its bull market highs.

A deeper look into the survey shows why they are so bearish. More than half of those surveyed believe the economy is in a recession, just 17 percent believe Congress and the president will agree on an economic plan that goes farther than just spending cuts and only three percent believe economic growth is poised to accelerate.

“Hedge fund managers have reversed their stance on U.S. equities,” stated the report on the survey conducted between Aug. 23 and Aug. 25. “Bearishness on the part of hedge fund managers squares with equity futures flows. Speculative traders have been net buyers of equity futures in only six weeks in 2011.”

Short interest, the number of shares being bet against a security, for the S&P 500 Index jumped 7.7 percent in mid-August, the largest increase since June 2008, according to Bank of America Merrill Lynch. Consumer, technology and financials are the most highly targeted sectors by short sellers, according to the firm.

The S&P 500 is down 15 percent from its 2011—and bull market high—on April. A 20 percent decline is the threshold that most consider to be a bear market. It appears hedge funds have plenty more dry powder to take us there.

“The level of free credit cash accounts—the money in margin accounts after margin requirements, short sale proceeds, and other factors are considered—is up 13.2 percent this year and stands at the highest level since early 2008,” stated the TrimTabs report.

Doug Kass of Seabreeze Partners took an informal survey of 14 of his hedge fund peers Tuesday.

“Only one hedge fund manager increased his net long exposure over the past two days,” said Kass. “Nine have lowered exposure and four have sat on their hands.”

To be sure, many investors take this giant leap in bearishnesses as a contrarian indicator. After all, this very same survey showed bullishness at a high for the year—43 percent—in July before the August slaughter.

“This is the one statistic that could tarnish my bearish view,” said Brian Kelly of Brian Kelly Capital. “When everyone runs to one side of the boat, it is almost always the wrong side of the boat to be on. For my part, I am locking in all my gains on the short side and looking for potential longs.”

Short sellers borrow shares from securities firms and sell them, profiting if the stock drops and they are able to buy back the borrowed shares at a lower price. TrimTabs/BarclayHedge surveyed 86 total firms.

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