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“Moods are still somewhat sour, but hedge funds returned 7.0% in the four months ended October following a rough patch in May and June,” said Sol Waksman, CEO of BarclayHedge. “About 80% of the funds that reported returns for the January-October period are profitable in 2010.”

Almost half of hedge fund managers believe QE2 will have a positive impact on asset prices, although four in 10 feel it will ultimately have a negative impact on the economy. Meanwhile, only 9% of managers plan to decrease leverage in the coming weeks, the smallest share since May, while 16% are inclined to increase it.

“It is telling that some managers aim to lever up even though they are predominantly downbeat on stocks,” explained Vincent Deluard, Executive Vice President at TrimTabs. “The Fed is begging firms, consumers, and market participants to take risks, and hedge fund managers are capitalizing on kind conditions. They view QE as an asset-price gift horse—one they are not looking in the mouth—and hedge fund investors have handed them $33 billion in recent months. Also, it certainly doesn’t hurt that managers can borrow to buy assets for virtually nothing courtesy of historically low short rates.”

Bearish sentiment on the U.S. Dollar Index surged to 44% in November, the highest level in six months, from 30% in October. Meanwhile, bond sentiment has been hammered as long-term interest rates have spiked. Bearish sentiment on the 10-year Treasury note vaulted to 49%, the highest level since May, while bullish sentiment dove to 13%, the lowest level in six months.

“Market participants have no interest in fighting the Fed in the belly of the curve, where its Treasury purchases are concentrated,” noted Deluard. “But hedge fund managers are very bearish on the 10-year, and futures traders have been dumping the 30-year bond contract. Also, mom and pop ditched bond mutual funds in the past fortnight after pouring money into them for 100 straight weeks, and TIPS funds have raked in assets in 2010. The more the market feels the Fed’s reflation strategy will succeed, the more powerless policymakers become to prevent long yields from grinding higher.”

(press release)

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