Hedge fund managers have turned bearish on US equities, according to TrimTabs Investment Research and BarclayHedge. About 38% of the 87 hedge fund managers the firms surveyed are bearish on the S&P 500, up from 29% in May and the highest share since February. Only 27% of managers are bullish, down from 30% in May.
“Downbeat views on domestic stocks characterised the first half of 2011,” says Sol Waksman (pictured), founder and President of BarclayHedge. “Hedge fund managers were net bearish on the S&P 500 in four of the first six months of the year. The grim mood coincides with weak performance. The Barclay Hedge Fund Index shows a year-to-date return of just 1.8% after increasing 10.9% in 2010.”
Managers have grown much less sour on the greenback. Bullish sentiment on the US Dollar Index held steady at about 29% in the past three months, while bearish sentiment plunged to 24% from 44%. In contrast, managers are much more pessimistic about US Treasuries. Bearish sentiment on the 10-year note surged to 44% in June from 34% in May, the largest share in six months, while bullish sentiment held steady at just 18%.
“Hedge fund managers may not like Treasuries, but our flow data shows that investors of all stripes are not shying from bonds,” says Vincent Deluard, Executive Vice President at TrimTabs. “Bond mutual funds, bond ETFs, and fixed income hedge funds continue to post sizeable inflows. Meanwhile, hedge fund managers tell us that they aim to increase leverage in the coming weeks even though they are relatively downbeat on stocks. Aggressive bets from this crowd could support equities in the second half of the year.”
About 74% of hedge fund managers do not expect the Fed to deliver more quantitative easing. At the same time, 64% of managers expect weaker corporate earnings in the coming two quarters, while 39% forecast that the economy will slip into recession in the next year.
“The recent correction in stock prices gave rise to fear,” says Deluard. “Margin debt decreased for the first time in 11 months, short interest increased to the highest level in six months, and the speculative crowd turned net sellers of equity futures. But equities have rebounded smartly because recent economic data shows that the soft patch was not the start of something more serious, and we are interested to see how managers adjust.”