Fund Managers Betting On US Recovery
Thursday, January 06, 2011

Hedge fund managers have turned "extremely bullish" on US equities as they prepare to bet aggressively on an economic recovery taking place in 2011, according to a new survey by BarcalyHedge and TrimTabs.

According to the firms, about 46% of the 92 hedge fund managers the firms surveyed in the past week are bullish on the S&P 500, while only 19% are bearish.

“These bullish and bearish readings are the highest and lowest, respectively, since the inception of our survey in May,” said Sol Waksman, founder and President of BarclayHedge, the Iowa-based hedge fund data vendor. “The enthusiasm is not surprising. Our Hedge Fund Index shows consistent gains in 13 of the past 14 years, and hedge funds are firmly on track for a profitable 2010.”

About 54% of hedge fund managers are bearish on the 10-year Treasury note, while only 14% are bullish - the highest and lowest readings, respectively, since May. In contrast, 39% of managers are bullish on the US dollar index, while only 13% are bearish - also the highest and lowest readings since May. Meanwhile, 23% of managers aim to lever up in the coming weeks, the largest share in six months, the survey indicates.

“Managers are betting aggressively on the economic recovery,” explained Vincent Deluard, Executive Vice President at TrimTabs, the independent research service. “While markets spent most of 2010 oscillating between overblown fears of a double-dip recession and irrational exuberance about a V-shaped recovery, an inflationary growth consensus has emerged heading into 2011. Moreover, the fact that every sentiment measure under the sun shows sky-high confidence could indicate that investors are a touch too jubilant. The bandwagon might be overly packed.”

The firms said that about half of managers attribute higher Treasury yields to expectations of higher inflation and stronger economic growth, while only 4% cite the negative debt implications of the extension of the Bush tax cuts. Meanwhile, a majority of managers feels precious metals are the most overbought asset.

“We are a little surprised to see precious metals top the list,” noted Deluard. “Gold funds generally took in more money in 2009 than they have received in 2010, and our flow data suggests bonds are much more overbought than metals. Mom and pop have been dumping bond ETFs and mutual funds for two months, but only after they poured a staggering USD705.5bn into them between January 2009 and October 2010. If a bubble is to burst in 2011, we believe bonds are the strongest candidate.”