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London: If hedge funds are, as is often claimed, the investment vanguard, their latest moves appear to be telling financial markets it is time to take a break from the trading patterns that have dominated since mid-2007.
Investment banks have been poring over the latest data on hedge fund positioning from the Commodities Futures Trading Commission (CFTC) and concluded that a number of speculative bets have been changed.
Societe Generale, for example, says long positions on 10-year government bonds have been closed. That is to say, hedge funds are not expecting demand for such bonds to increase and drive yields lower.
Similarly, hedge funds have sharply cut back their long euro-dollar holdings, meaning they now expect the dollar to strengthen or at least stabilise against the single currency. As for equities, recent moves would also seem to be good news for those yearning for a return to the bull market.
"Confirmation of further policy action to reflate economic growth has led to a significant reduction of shorts on the S&P 500 and an increase of shorts on volatility," SocGen said.
In other words, hedge funds have stopped betting that the broad US stock index will fall and are now betting that volatility, or sharp moves on the index, will ease off.
"Once you get a 75 basis point rate cut from the Fed with the promise of more to come... most traders don't want to bet against that," said Edward Hands, senior portfolio manager for alternative investments at Comas, part of Commerzbank Corporates and Markets.
He was referring to the emergency rate cut by the US Federal Reserve on January 22.
The significance for many investors is that hedge funds often blaze the way on markets, either by taking bets more mainstream funds are not willing or able to take, or by moving the markets themselves with their bets.
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