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Top Hedge Funds Put Likelihood of QE3 at 60%

Date: Friday, August 5, 2011
Author: Lee Brodie, CNBC.com

According to top hedge fund manager Anthony Scaramucci, hedge funds now believe the chance of another Fed intervention is greater than 1 in 2.

Scaramucci's firm, Skybridge, surveys 950 hedge funds and after extensive conversations with peers, analysts at Skybridge are now predicting as great as a 60% likelihood that the Fed implements QE3.

He says largely hedge funds are focused on something called the Taylor Rule in which “the Fed looks at a couple quantitative factors such as inflation, unemployment and economic growth and enters them into a calculus to determine where interest rates should be.”

”Using that analysis interest rates should be at minus 3.5%,” he reveals.

But that's not the only reason he thinks QE3 is back on the table. On top of that, he says the S&P slipped back down to the November 4th level. “The stock market benefits of QE-two have been erased."

That’s problematic because the Fed had been hoping the wealth effect – or making people feel richer - would drive spending and, in turn, buoy the economy. But if the S&P is back at pre-QE2 levels, that prong of the Fed’s plan to stimulate the economy would no longer be relevant.

On top of that he says hedge funds are concerned about the dysfunction in government displayed by the bickering among politicians over the debt ceiling. They're also concerned that businesses are not deploying cash and that there's stagnation in employment.

Considering all these negative catalysts, “it seems ever more likely the Fed will have to intervene in the market to stave off another recession,” Scaramucci says.