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Hedge fund managers remain downbeat on US equities

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Hedge fund managers remain downbeat on US equities, according to the TrimTabs/BarclayHedge survey of hedge fund managers for October. 

About 39 per cent of the 102 hedge fund managers the firms surveyed in the past two weeks are bearish on the S&P 500, up from 37 per cent in September.

“The lean toward bearishness surprises us a bit because extreme caution in September produced substantial underperformance,” says Sol Waksman, chief executive of BarclayHedge. “We suspect managers will invest much more aggressively in the current quarter. Stock prices keep grinding higher, and hedge funds hauled in USD18.8bn in the past three months. Managers have to put that fresh cash to work.”

About 32 per cent of managers cite currency wars as the biggest threat to global financial stability, and 36 per cent feel world leaders should focus on the problem of too-big-to-fail institutions at the November 11-12 G-20 Summit in Seoul. 

Only half of managers think a Republican party victory in the US midterm elections will be a plus for stocks, while a quarter feel it will have no impact.

“That Republicans will seize control of the House tomorrow is already baked in,” says Vincent Deluard, executive vice president at TrimTabs. “Also, while the Fed is capable of inflating the value of stocks and bonds, hedge fund managers are seasoned enough to know there is little politicians can do to juice asset prices.”

About 28 per cent of hedge fund managers are bearish on the ten-year US treasury note, the largest share since the inception of the survey in May. 

In contrast, 32 per cent of managers are bullish on the US dollar index, the largest share since June. 

Only nine per cent of managers aim to decrease leverage in the coming weeks, while 19 per cent plan to increase it.

“Why are downbeat managers inclined to lever up? Short rates that round to zero mean borrowing is virtually costless—that’s an attractive incentive,” says Deluard. “Also, a third of hedge funds are underwater for the year, and half posted a return smaller than two per cent through September. Many managers need a blockbuster Q4 in order to collect performance fees for the year.”

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