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The more I read this story, it all sounded vaguely familiar:

  • The fast money is proving slow to jump on the market's bandwagon. Hedge funds, decried by many as quick traders, have played catch-up during the market rally since March. The average fund was 45% "net long" as of May 19, or had investment holdings valued at 45% more than its bearish "short" positions, according to Hedge Fund Research. That figure is up from 33% earlier this year, but still is far below its 55% level a year ago. Funds are less bullish now than they were just before the market crumbled last fall.
  • Hedge-fund managers, and their investors, said many remain in a neutral position. Many funds are skeptical the economy has entered a new period of growth that justifies high equity multiples. Others fear dislocations from governments shoveling money at problems.
  • Hedge funds tend to underperform stock-market averages at inflection points, in part because they aim to create a "hedged" performance, rather than ape the market. (uhh, that was DISPROVED last year - many were simply leveraged up the gills betting on 1 side of the market.. and paid the price)
  • While a stock surge might force a mutual-fund manager to jump in because he is judged against the index, the pressure on hedge funds is less. (but not if "the market" puts on another 20% from here) If stocks keep surging, hedgies might have to jump in with two feet, giving the market another lift. (I can agree with that, you can only sit so long if "the market" continues in one direction - and just about the time every last skeptic has thrown in the towel, we'll reverse. Or at least we used to before the Invisible Hand drove the market up 1%+ in a flurry of futures buying on Friday afternoons. Or jumped futures to a positive skew almost every morning between 7 AM and 9 AM). But their continued hesitancy should be a sign of caution for investors.
  • Some noted stock pickers remain wary. Steve Mandel's Lone Pine Capital bought long-dated, out-of-the-money call positions representing 2.6 million shares of a gold exchange-traded fund in the first quarter, while Och-Ziff Capital Management Group and Atticus Capital have been cautious on the market.

I'm not sure buying a long-dated out of the money call position in gold is necessarily a negative call on the market. It is just a very bullish call on paper printing "prosperity".... i.e. inflation. If one believes the Fed can successfully inflate every asset under the moon, stocks will be no different - every asset of limited supply should be chased ever upward as an unlimited supply of newfound paper US pesos is thrown upon us. (p.s. there is now - from what I am reading - approaching $1 trillion of newfound money sitting on banks' balance sheets; when they finally decide to lend this out instead of hoard it... at their typical 7:1 ratio - it will be scary liquidity).

So S&P 1500 (i.e. prosperity) can go nicely with gold $1500. However bread $3, gas $4 are some of the ill effects. But we're all winners in nominal terms as most people will only focus on the wins not realizing the inflation adjusted returns. There are benefits of having sheeple who remain financially in the dark. Let's see if the master plan works. Can't wait for the next Hugh Hendry update as the horde has continued to work against him... [Apr 28: The Latest Hugh Hendry] the bulls are running away with inflation in the inflation v deflation debate.


Source: Are Hedge Funds Missing the Rally?