Hedge fund managers remain predominantly downbeat on US equities, according to the TrimTabs/BarclayHedge survey of hedge fund managers for November. 

About 39 per cent of the 83 hedge fund managers surveyed are bearish on the S&P 500, and bullish sentiment sank to 31 per cent from 36 per cent in October.

“Moods are still somewhat sour, but hedge funds returned 7.0 per cent in the four months ended October following a rough patch in May and June,” says Sol Waksman, founder and president of BarclayHedge. “About 80 per cent of the funds that reported returns for the January-October period are profitable in 2010.”

Almost half of hedge fund managers believe QE2 will have a positive impact on asset prices, although four in ten feel it will ultimately have a negative impact on the economy. 

Meanwhile, only nine per cent of managers plan to decrease leverage in the coming weeks, the smallest share since May, while 16 per cent are inclined to increase it.

“It is telling that some managers aim to lever up even though they are predominantly downbeat on stocks,” says Vincent Deluard, executive vice president at TrimTabs. “The Fed is begging firms, consumers and market participants to take risks, and hedge fund managers are capitalising on kind conditions. They view QE as an asset-price gift horse — one they are not looking in the mouth — and hedge fund investors have handed them USD33bn in recent months. Also, it certainly doesn’t hurt that managers can borrow to buy assets for virtually nothing courtesy of historically low short rates.”

Bearish sentiment on the US Dollar Index surged to 44 per cent in November, the highest level in six months, from 30 per cent in October. Meanwhile, bond sentiment has been hammered as long-term interest rates have spiked. 

Bearish sentiment on the ten-year Treasury note vaulted to 49 per cent, the highest level since May, while bullish sentiment dove to 13 per cent, the lowest level in six months.

“Market participants have no interest in fighting the Fed in the belly of the curve, where its Treasury purchases are concentrated,” adds Deluard. “But hedge fund managers are very bearish on the ten-year, and futures traders have been dumping the 30-year bond contract. Also, mom and pop ditched bond mutual funds in the past fortnight after pouring money into them for 100 straight weeks, and Tips funds have raked in assets in 2010. The more the market feels the Fed’s reflation strategy will succeed, the more powerless policymakers become to prevent long yields from grinding higher.”