Hedge funds finding more comfort in equities

The Globe and Mail

Spurred by the months-long U.S. stocky rally, hedge funds south of the border are starting to get comfortable with buying equities again.

Such bullishness is measured by the International Strategy & Investment Group, which found that the proportion of bets on shares jumped to 48.6 last week, up from 42 at the end of November.

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As Bloomberg News explains, the index tracks the funds’ net exposure on a scale of 0 to 100. A reading of 0 shows maximum short selling, while a reading of 100 means maximum bullish bets. A reading of 50 is a “normal” ratio of long to short investments. (The Group’s survey looks at 36 mostly U.S. hedge funds with about $89-billion under management, so not a massive sample, but decent enough.)

Because hedge funds have been late to the equity rally, they’ve missed out on some solid returns. Bloomberg’s aggregated hedge fund index gained 1.4 per cent last month, lagging the S&P 500 by 2.65 percentage points.

In Canada, the aggregate numbers are a bit more dated, but the Scotiabank Canadian Hedge Fund Index posted a return of just 0.3 per cent during the first two months of the year, while the S&P 500, quoted in U.S. dollars, climbed 8.6 per cent and the S&P/TSX Composite Index jumped 5.76 per cent.

A reversal in bearishness can also be seen in the number of shorts being removed from what were until recently the most heavily shorted names. Bloomberg notes that the number of shorts against Sears Holdings, Bank of America Corp and Netflix have all dropped dramatically.

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