Hedge fund managers turn bullish on US equities

Date: Wednesday, August 3, 2011
Author: Wendy Chothia, HedgeWeek

Hedge fund managers have turned bullish on US equities, according to BarclayHedge and TrimTabs Investment Research. Bullish sentiment on the S&P 500 among hedge fund managers soared to 43% in July, the largest share since December 2010, from 27% in June. Bearish sentiment sank to 27%, the smallest share since January 2011, from 38%.

“This reversal is striking,” says Sol Waksman, founder and President of BarclayHedge. “Hedge fund managers were meaningfully bullish on domestic stocks in only one month in the first half of the year.  Our research shows that hedge fund sentiment is a decent leading indicator, so the shift could help support stock prices in the near term.”

Managers remain very sour on long-dated Treasuries.  Bearish sentiment on the 10-year note edged lower to 42% in July from 44% in June. Bullish sentiment sank to 12%, the smallest share in more than seven months, from 18%. Meanwhile, managers remain modestly bullish on the U.S. Dollar Index. Additionally, 16% aim to lever up in the near term, while 11% plan to deleverage.

“Hedge fund managers have been net bearish on the long end all year even though the 10-year yield plunged to 2.88% in June from 3.75% in February,” notes Minyi Chen, Vice President of Quantitative Research at TrimTabs. “Meanwhile, it does not surprise us that managers remain inclined to lever up because performance has been lacking. The Barclay Hedge Fund Index shows a return of just 1.1% in the first half of the year.”

About 68% of hedge fund managers describe the valuation on the S&P 500 as fair or cheap, while 32% feel it is rich.  Meanwhile, when asked to choose the most overbought item from a list that included oil, gold, US equities, US Treasuries, and European equities, 36% of managers picked gold. Only 4% chose European equities.

“That result surprises us,” says Chen. “The precious metals flow data we track daily does not scream bubble, and speculative traders had much larger net long positions on gold futures in August and December of last year. Meanwhile, European equity ETFs boast a huge year-to-date inflow of 23.6% of assets. That’s a lot of money chasing an asset that posted a negative return of 5.1% in the past three months.”