Hedge funds have jacked up their bets on the stock market to their highest levels of 2016 and cut back on short positions to a three-year low amid a blistering post-election rally.
For the fourth quarter, the $3 trillion industry increased its net exposure — the difference between short and long positions — to 63 percent, a level that equates to a net $656 billion, according to Bank of America Merrill Lynch data. Hedge funds were last this optimistic in the fourth quarter of 2015.
Managers have been rewarded for their optimism. The S&P 500 is up 4.4 percent for the quarter, while the Dow Jones industrial average has surged 8.9 percent and is threatening to eclipse 20,000 for the first time.
Interestingly, the industry misjudged somewhat where the biggest gains would come. Hedge funds cut their exposure to small-cap stocks to the lowest level since the second quarter of 2014, at a time when the Russell 2000 has jumped 9.6 percent.
Otherwise, though, hedge funds made some smart bets, according to BofAML's tracking.