Hedge Funds’ Bets on S&P 500 Futures Are Most Bearish Since September 2007

Bearish bets by investors using Standard & Poor’s 500 Index futures increased to the highest level in almost four years amid concern global economic growth is stalling.

Hedge funds and other large speculators were net short 107,913 contracts in the week ended Aug. 30, wagering that the S&P 500 will decrease in value, according to data compiled by Bloomberg and the U.S. Commodity Futures Trading Commission. The position is the highest since September 2007, when bearish bets reached a record 127,474 contracts a month before the benchmark equity gauge peaked at an all-time high, Bloomberg data going back to 1997 show.

“If they’re global macro funds, they may be doing this because they think risk is to the downside in the S&P 500,” Michael Purves, chief market strategist at BGC Partners LP in New York, said in a telephone interview. “The long/short hedge funds may also be shorting futures simply to hedge out single stock longs.”

The S&P 500 fell 57 percent from its 1,565.15 record in October 2007 to a 12-year low of 676.53 on March 9, 2009, during the worst financial crisis since the 1930s. The index then more than doubled to an almost three-year high on April 29, fueled by government stimulus and better-than-estimated corporate earnings, before sliding as much as 18 percent amid concern the economy was weakening. The gauge lost 13 percent last month before trimming its retreat to 5.7 percent after the Federal Reserve said it will act to spur growth.

Short Selling

The proportion of S&P 500 shares outstanding sold short rose to the highest level since the end of November last week, climbing to 3.03 percent on Aug. 29 from 2.37 percent at the beginning of August, according to New York-based Data Explorers, which provides research on short sales and stock lending. Short selling of the gauge reached a three-year high of 5.52 percent in August 2008.

The S&P 500 has declined 1.1 percent on average in September since 1928. It’s one of three months in which stocks have fallen, with the next-closest a 0.2 percent loss in February. Since the bull market began in March 2009, September has produced the biggest gains, averaging 6.2 percent.

Stocks in the S&P 500 are moving in tandem. The number of companies rising or falling has reached 400 on 35 days this year. If the current pace persists, the phenomenon will occur on 51 days in 2011, one short of the record 52 in 2008, according to data compiled by Bespoke Investment Group LLC.

“Stocks are moving in lockstep and that makes broad hedges such as betting against S&P 500 futures cleaner,” Uri Landesman, managing general partner of Platinum Partners LLP, said in e-mail. “For people who like to bet the S&P directionally, volatility is what attracts them here,” said Landesman, who helps manage $1 billion at the New York-based hedge fund. “The more volatile the market is, the more juice there is in the contracts if you trade them on a short-term basis.”

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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