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Hedge Funds Cut Stock Holdings Before European Crisis Summit

Date: Friday, October 28, 2011
Author: Nikolaj Gammeltoft, Bloomberg

Hedge funds reduced bets that stocks will rise to almost the lowest level since 2009 this week, according to International Strategy & Investment Group.

ISI’s index of “net exposure” to stocks slipped to 44.7 yesterday, compared with its 2011 high of 54.2 in February, according to a note sent to clients. The measure climbed to 45.5 on Oct. 12 after declining to 44 on Sept. 21, the lowest level since April 2009.

Concern European leaders would fail to reach an agreement for containing the sovereign debt crisis spurred speculators to reduce holdings after the Standard & Poor’s 500 Index lost as much as 19 percent since April. The benchmark gauge for American equities rallied today after European leaders in Brussels agreed to expand a bailout fund. It’s poised for the biggest monthly increase since 1974, data compiled by Bloomberg show.

“Unfortunately, we were in the same camp of being very defensive,” Dennis Leibowitz, managing general partner at Act II Partners LP, said in a telephone interview today. The New York-based hedge fund manages about $400 million. “This rally has been so fast and furious that we have not been able to participate, which is probably true of a number of funds.”

Leibowitz said the firm increased bets over the past month that stocks would rise.

Maximum Short

The index from New York-based ISI, based on a survey of 35 mostly U.S. hedge funds with about $84 billion under management, tracks investments on a zero through 100 scale. Readings of zero show “maximum” short selling, or the sale of borrowed equities with the hope of profiting by buying them at lower prices later, while 100 means “maximum” bullish bets. At 50, hedge funds are deploying a “normal” allocation to short and long investments.

The S&P 500 rose 3.4 percent to 1,284.59 today, erasing its 2011 loss and rising to the highest level since Aug. 1. The benchmark gauge has climbed 14 percent in October. European leaders convinced bondholders to accept 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a package intended to shield the euro area.

“The hedge funds are not participating as much in the rally as they probably would like to,” Oscar Sloterbeck, managing director at ISI, said in a telephone interview today. “This could potentially lead funds to increasing exposure in order to chase the market performance.”

September Retreat

Hedge funds slumped 3.4 percent in September, their worst performance since October 2008, as global stocks tumbled amid a worsening European debt crisis and the threat of a U.S. recession, according to Chicago-based Hedge Fund Research Inc. The HFRI Fund Weighted Composite Index decreased to 10,370.80 from 10,739.31 in August, contributing to a decline of 5.4 percent this year.

Investors increased bearish trades around the world by the most in at least five years last month. Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock in September from 9.5 percent in July, the biggest increase since at least 2006, according to information compiled for Bloomberg by Data Explorers.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net