Hedge Funds Trim Bullish Nasdaq Bets as Cost of Protection SoarsSofia Horta e Costa
Enthusiasm is waning among the largest speculators for the rally that has sent the Nasdaq 100 Index up more than 25 percent in the last 16 months.
Hedge funds lowered their net-long positions on the gauge of technology shares at the fastest pace since January last week, cutting them 31 percent to 46,265 futures, according to data from the Commodity Futures Trading Commission. That’s about half as many as they owned in April. At the same time, options protecting against declines in the equities surged to their highest price ever relative to bullish contracts.
After betting on gains in tech shares for more than two years, hedge funds are starting to grow skeptical. The Nasdaq Composite Index has rallied twice as much as the broader market this year, making some of the pricier tech stocks more vulnerable to market jitters as the Federal Reserve prepares to raise borrowing costs.
“The equity market is getting real about the eventuality of interest rates rising, and you’ve got very highly valued pockets of tech,” said William Hobbs, the head of equity strategy at Barclays Plc’s wealth-management unit in London. “As rates go up, the cost of capital will increase and your most expensive names should be hardest hit.”
While the Nasdaq Composite has advanced 7.2 percent this year, industries that led its gains have faltered. Biotechnology shares lost as much as 9.1 percent in April, and social-media stocks fell 6.5 percent in less than two weeks.
The Nasdaq Composite trades at 22 times the estimated profits of its members, higher than its average multiple of 18 in the past five years. The Nasdaq Biotechnology Index has a valuation of 52, and social-media companies such as LinkedIn Corp. and Yelp Inc. have a multiple surpassing 65.
Mixed economic data have divided speculation about when the Fed will raise interest rates and at what pace. Investors will seek clues on the timing when the Fed releases the minutes of its April meeting on May 20.
Even as sentiment moderates, analysts project earnings at U.S. tech companies will rise 13 percent this year, more than any other industry group on the Standard & Poor’s 500 Index.
Speculators have been net-long Nasdaq 100 futures since 2012, with a peak in bullish positions in May 2013. Their bets proved right: The Nasdaq Composite has climbed more than 45 percent since then, almost double the S&P 500’s advance.
Traders aren’t taking chances. The cost of protecting against a 5 percent decline in the next six months in the Powershares QQQ Trust Series 1, an exchange-traded fund tracking the Nasdaq 100, reached a record relative to bullish options on May 6. There were 58 percent more puts than calls as of the end of last week, with the most-owned contract betting on a 6.4 percent drop by May 29.
Investors have withdrawn $1.7 billion from that ETF this month, data compiled by Bloomberg show. In total, U.S. funds tracking tech stocks have lost more than $830 million this year.