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Hedge funds behind last week's dip, Merrill report finds

Date: Wednesday, November 29, 2006
Author: Jacqueline Thorpe, Financial Post

Hedge funds have often been identified as the primary driver behind scorching price gains for everything from copper to orange juice in recent years, but Merrill Lynch tries to put some actual numbers behind their activity with their weekly hedge fund monitor.

Among the findings this week: Macro hedge funds were the primary force behind the equity market correction this spring.

Last week, hedge funds began to sell their record long position in the S&P 500, from an estimated notional US$20-billion to $17-billion.

The weakness in the market on Monday may have accelerated the liquidation process, Merrill's report says, as the S&P 500 fell through the 20- and 30-day moving averages, which is where funds often place their stop-loss orders.

The hedge funds have been buying the Nasdaq 100 to a net long position of a notional $2.3-billion, said Merrill, which sees additional buying through to year-end.

Merrill says speculators' positions in platinum are relatively low. This suggests it can rally further as silver did before its ETF came on the market.

Hedge funds have pushed copper futures to a record crowded short position of about US$1.4-billion, possibly providing a floor under the metal despite its recent technical weakness.

Speculators are long natural gas, slightly long oil and still long in gold, according to the report.