Column: Fund capitulation on record short US equity bet pays off
In the two months since hedge funds began bailing on their record net short position in S&P 500 futures their equity returns have accelerated, narrowing the yawning year-to-date underperformance versus the broader market.
The question now is do funds have the appetite to go outright long, bearing in mind how high the S&P 500 index is, how expensive U.S. stocks are, and how high nominal and real bond yields are? Just two months ago, at the end of May, funds were net short to the tune of 434,000 contracts, the largest net short position on record since these contracts were launched in 1997.
Not coincidentally, the S&P 500 rose 10% in that period and hedge funds essentially tripled their year-to-date equity returns - the HFRI Equity Hedge Index at the end of July was up 7.83% YTD compared with 2.51% at the end of May.
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