Hedge funds cutting back

Equity markets had another mixed day on Tuesday ahead of the release of the Federal Reserve minutes. Post the announcement, equity markets seem to take heart at the news that the U.S. central bank remains committed to complete the winding down of the bond purchase program in October. The consensus view amongst market analysts, after the release, appears to be that equity investors were taking heart that the Fed was confident enough in the recovery of the economy to withdraw the extra liquidity. What would have seemed surprising a few months ago but now seems more predictable, 10-year treasury yields fell after the release of the minutes. The Vix also traded lower at the end of the day having risen modestly over the past few days.

Central bankers continue to remain in focus. Away from the actions of the Fed, as Mario Draghi in a speech on Wednesday reiterated that the ECB is prepared to use "unconventional measures" to stimulate the euro zone economy should they be needed.  The view amongst many market analysts remains that at some stage these measures will be required, as the euro remains stubbornly robust. On Thursday the Bank of England announces its monthly Interest rate and quantitative easing decision, and expectations are for no change.

There is always something in the financial press to catch ones eye, and Wednesday was no exception. We wrote the other day about the poor year hedge funds have been having in this low volatile environment. We said this would lead to an increase in risk taking by the hedge fund groups. Some evidence came to support that view today, as the FT led on Wednesday with the results of a survey conducted on their behalf by Markit. Hedge funds have significantly cut back their bearish bets that the value of stocks is about to fall. The proportion of shares earmarked for short selling is at its lowest level since before 2008. Markets, as we often point out, move in the direction that can cause the most pain, and if the conclusions of this report were right, a correction post the reduction in short positions would cause the hedge fund community more pain.

Posted on July 10, 2014 .