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Hedge Funds May Be Forced to Chase Performance Into Year's End

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The S&P 500 is up 13% since the August 27 bottom, but the fickle fast-money crowd isn’t feeling optimistic about this run-up.

Quite the contrary: Hedge fund managers remain downbeat on U.S. equities, according to the latest TrimTabs/BarclayHedge Survey released this morning. About 39% of the 102 hedge fund managers the firms surveyed in the past two weeks are bearish on the S&P 500. That’s up from 37% in September.

These so-called “smart money” pros have paid for this ill-timed bout of pessimism: the industry’s caution in September produced substantial underperformance. Now a third of hedge funds are underwater for the year, and half posted a return smaller than 2% through September.

But this well-heeled crowd is paid for performance and they can’t allow a headline-making advance to happen without them. So, now behind their benchmarks and desperate to play catch up, analysts bet this crew of MBA-stamped money makers will have to get long.

“We suspect managers will invest much more aggressively in the current quarter,” says Sol Waksman, CEO of BarclayHedge. “Stock prices keep grinding higher, and hedge funds hauled in $18.8 billion in the past three months. Managers have to put that fresh cash to work.”

It’s also interesting to note just which hedgies have hauled in the moola. A select handful has raked in a lot of that money.

Specifically, Och-Ziff Capital Management Group LLC, Elliott Management Corp. and Comac Capital LLP that have now reportedly pulled in almost a fifth of the money going into the $1.7 trillion hedge- fund industry this year, demonstrating how selective your wealthy friends and neighbors have become when allocating their assets.

As for how they feel about other asset classes: About 28% of hedge fund managers are bearish on the 10-year Treasury note, the largest share since the inception of the survey in May. In contrast, 32% of managers are bullish on the U.S dollar index, the largest share since June. Only 9% of managers aim to decrease leverage in the coming weeks, while 19% plan to increase it.
POSITION:  No positions in stocks mentioned.