September 30, 2013 6:56 pm

Hedge funds move out of shorts with eyes on bull run in markets

Hedge funds’ bets on falling share prices have dropped to their lowest level in years as traders predict an extended bull run for equities over the coming months.

According to data from Markit, the overall value of short positions on European shares has dropped to $133bn, the lowest level since the data provider began monitoring in 2006.

In the US too, short positions are touching record lows. Just 2.4 per cent of S&P 500 shares are on loan to short sellers, Markit said.

The figures represent hedge funds’ conviction that equity markets are poised for significant further gains in the wake of the US Federal Reserve’s decision not to curb its programme of quantitative easing earlier this month and renewed belief in strong corporate performance in the coming months.

“The dynamics in the securities lending markets prior to the Lehman crash were completely different than they are today,” said Alex Brog, director at Markit. “Firstly, there were far more hedge funds, which were more leveraged. Regulatory uncertainty has deterred some from engaging in short selling. Also in today’s prolonged bull market, it has been hard for short sellers to bet against a rising tide, much of which has been driven by macroeconomic sentiment.”

Global equities have risen 19 per cent so far this year, according to the MSCI All World Index.

US stocks have been among the strongest performers. The S&P 500 is up 18 per cent over the past nine months.

Paul Hickey, co-founder of Bespoke Investment Group, said that US equities have average positive returns on the day of their earnings report for the past five quarters, the longest streak for Wall Street stocks in at least a decade. The US third-quarter earnings season is about to begin.

“With shorts getting burnt repeatedly, there are only so many times you are going to put your hand on the hot stove,” he said.

The average equity hedge fund has made about 7 per cent so far this year, according to HFR, though some of the biggest names in the industry have posted outsize returns.

TCI, the $7bn London-based activist hedge fund run by Christopher Hohn, is up 34 per cent so far for 2013, according to an investor. Mr Hohn has enjoyed big gains from investments in companies such as EADS in Europe and News Corp in the US.

Lansdowne Partners, Europe’s biggest equity hedge fund, is meanwhile up 20 per cent, thanks in part to wagers on US banks.

John Paulson, the US hedge fund manager who correctly called the housing bubble in 2007, has seen big gains for his Recovery fund, which is geared to the state of the US economy. The fund has made its investors more than 35 per cent in the first eight months of the year, thanks to US stock market picks.

This piece was changed on October 1 2013 to reflect the latest Markit data ($144bn was changed to $133bn).

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