Hedge funds have opened the biggest short position on the S&P500 since December 2008

Hedge funds held a net short position of 71,980 short contracts at August 16, according to a monthly report on global asset allocation from Societe Generale, which looks at positions reported to the Commodity Futures Trading Commission. This is the biggest figure seen since December 2008, three months after the collapse of Lehman Brothers, when hedge funds held a net short position of 85,984 short positions.

Alain Bokobza, head of global asset allocation at Societe Generale, and one of the authors of the report, told Financial News: “Active market participants have switched to a massive net short. They have reacted very strongly to the recent economic and political newsflow. It’s a very important figure. It indicates just how pessimistic hedge funds are.”

Bokobza said that there’s a correlation between hedge funds opening the net short position and the S&P500 falling. "They have been partly initiating the fall by opening the net short.”

The S&P500 was trading at 1,192.76 on August 16 and fell to a low of about 1,121.45 on Tuesday.

According to CFTC data, the number of net short contracts hit a high of 127,474 in early September 2007, at the peak of the sub-prime housing crisis. Hedge funds currently account for 14% of total open interest on the S&P500, according to the CFTC.

US markets are poised to digest several events later this week. The Kansas City Federal Reserve’s survey - a regional manufacturing report - will be released tomorrow; a second reading on second-quarter GDP is scheduled for release on Friday; also on Friday, Federal Reserve Chairman Ben Bernanke will speak on the direction of the US economy at an annual conference in Jackson Hol, hosted by the Kansas City Fed; and the final reading of the Reuters/University of Michigan Consumer Sentiment Index is due.

Bokobza said that hedge fund reaction to this newsflow may have an impact on the S&P500. He said: “At some point they will have to take profits and cover their shorts. Technically this will be a bullish indication for equities."

Hedge funds continue to hold a long position in gold, according to the Societe Generale report.

(Financial News, August 24, 2011)