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"Hedge fund managers were extremely bearish on equities at the end of August, and they remain downbeat even though the S&P 500 soared 8.8% in September," said Sol Waksman, founder and president of BarclayHedge. "Negative sentiment has proven costly, as the industry underperformed by more than 500 basis points last month. But managers are sticking to their bearish guns; four in 10 are forecasting stock prices will fall at least 2% in the coming weeks."

About 27% of hedge fund managers are bearish on the 10-year Treasury note, the largest share in four months, while only 24% are bullish. Additionally, 36% are bearish on the U.S dollar index, while only 21% are bullish. These shares are the largest and smallest, respectively, since May. Meanwhile, 19% of hedge fund managers plan to increase leverage in the next month.

"While managers dislike stocks, bonds, and the greenback, many aim to lever up," said Vincent Deluard, Executive Vice President at TrimTabs. "Short rates are essentially zero, the 10-year Treasury yields a scant 2.5%, and real interest rates are negative. Where there's an incentive to increase leverage, managers will act."

About 79% of managers attribute record company cash balances to uncertainty about the economic and political/regulatory outlooks, while only 14% cite a lack of profitable investment opportunities. About 28% of managers want firms to use excess cash to pay down debt, while 17% prefer they keep it on the balance sheet.

"Managers want companies to exercise caution," explained Deluard. "Typically, they'd promote acquisitions and capital spending, stock buybacks, and increased dividends. But in a muddy economic environment a month ahead of midterm elections, managers favor hoarding cash and preparing for the worst."

(press release)

The TrimTabs/BarclayHedge database tracks hedge fund flows on a monthly basis. The TrimTabs/BarclayHedge Hedge Fund Flow Report provides detailed analysis of these flows as well as relevant topical studies. Click here for further information.

- FG