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Institutional Bearishness Surges as Default Worries Rise

Hedge funds, who have been big losers this year, are getting even more bearish than they have been.  It’s an interesting dynamic at work here.  Usually, as the year-end approaches, we start to see institutional managers driving the broad indices higher as they chase performance.  But many hedge funds appear to be hoping for a last gasp here as they expect the S&P 500 to turn south so they can close the gap between their 4.3% return and the 16% return of the S&P 500 this year.

According to ISI Group bearish bets by hedge funds are near the high of the year (via Bloomberg):

“Hedge funds, whose bearish bets on stocks have held their returns to half the Standard & Poor’s 500 Index in 2013, pushed short sales close to the highest level of the year just as the U.S. budget impasse spurred a doubling in volatility.

Rising bets against equities sent a gauge of manager bullishness compiled by ISI Group LLC within 0.2 point of its lowest reading in 2013 last week. Short sales have backfired as the S&P 500, up 19 percent this year, posts one of its broadest rallies on record.

The ISI index of hedge fund long versus short bets fell to 48.4 in the week ending Oct. 9, from a 2013 high of 52.5 in March, data from the New York-based research firm show. Its lowest point this year was 48.2 in August. As ISI’s index decreases, it indicates managers are growing more bearish on equities. The measure dropped 4 percent in the last three weeks.

“As of Wednesday, hedge funds had turned cautious on the market amid the federal government shutdown and approaching debt ceiling,” Oscar Sloterbeck, senior managing director at ISI, said in an e-mail on Oct. 11. “While positioning does not appear extreme historically, the survey suggests there is buying power for equities if a deal is reached in Washington.”

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