TrimTabs Reports Percentage Of Hedge Funds Expecting To Raise Leverage In September Surges

Tyler Durden's picture

With just one month left in the quarter, most hedge funds continue to underperform the market, not to mention that the vast majority continues to be under their high water mark (most notably Citadel). And with fickle LPs, unbound by lock ups courtesy of the 2008 crash, knowing all too well they can now move their money with the facility of a HFT frontrunner churning AMZN one thousand times a second, threatening redemptions unless something changes in the last month of the quarter, hedge funds are, for lack of a better word, panicking. Yet as we have long been demonstrating, the vicious loop of high correlations and mutual fund withdrawals means that alpha generation is gone the way of the dodo. Which means that HFs will now seek to actively lever up into the market to chase the beta wave over September like never before. This is indeed confirmed by TrimTabs latest Hedge Fund Flow Report, which finds that the percentage of HF managers expecting to raise their leverage exiting August is 21.2%, the highest in 4 months, and possibly all of 2010, and triple the 7.7% responding affirmatively in May. And as riding a leveraged beta wave is nothing but a coin toss on the market with dire consequences if wrong, look for market volatility in September to hit multi-month highs, especially if macro economic conditions continue to deteriorate and investors are forced to buy against the grain. 

The chart below shows the trend of increasing desperation in the hedge fund community:

Here is TrimTabs explanation:

Hedge fund managers are also more inclined to lever up than they were last month. About 21% expect to increase leverage in the next month, sharply higher than 14% in July. Only 11% of managers aim to decrease leverage in the coming weeks, the smallest share since the start of our survey in May. We suspect managers are feeling bolder because recent outflows proved relatively mild. We estimate that hedge funds redeemed only $2.7 billion in June and $3.0 billion in July. Managers were much more reluctant to increase leverage when credit fears in Europe triggered concern about another liquidity crisis.

Additionally, TrimTabs has found that bearish sentiment on stocks in August is the highest it has been since May. Of course, the simplistic contrarian view is that with so many bears out there, the market is poised to rebound.

Hedge fund managers have turned markedly more bearish on equities. About 47% of the 104 managers we surveyed in the past week are bearish on the S&P 500, up sharply from 33% in July. Bullish sentiment decreased to 17% from 34%. The August bearish reading of 47% is the highest since May’s reading of 52%, which bodes ill for equities.

Yet despite the increasing alleged equity bearishness, there was no corresponding increase in NYSE short bets, and in fact, July saw a decline, making one wonder just how truthful the sampled respondents were in their answers:

Bearish sentiment did not prompt a spike in short bets. Indeed, NYSE Short Interest decreased 1.7% in July to land 5.4% south of the June peak. We suspect Short Interest declined because the strength of the July rally took managers by surprise and forced them to cover underwater positions. Our research shows that changes in Short Interest are historically a leading contrary indicator, so we believe the recent decrease in short bets favors lower stock prices.

So what does all this mean? Absolutely nothing. The days when hedge funds (or equity mutual funds) mattered are long gone: the only thing that is relevant these days is on what side of the bed does Bernanke wake up, and what subliminal messages about the imminent date of QE does his blinking pattern telegraph to the primary dealers. Everything else is noise. Yet the increasing leverage is a fact (we have confirmed this via independent conversations with Prime Brokers) and more than anything, it means that just like some hedge funds will make off like bandits in the next 28 days, others will most certainly blow up. Perhaps the administration can just advise where the S&P will close to within a penny of the final price on September 30, so we can proceed straight to the heckling festivities.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ATG's picture

So what does all this mean? Absolutely nothing...

despite the increasing alleged equity bearishness, there was no corresponding increase in NYSE short bets, and in fact, July saw a decline

=Look out below?...

plocequ1's picture

It means nothing. Bernanke and his band of merry men will be there to save the market. You don't need an analyst or chart to know that the fed will do everything in it's power to keep the bull run going.

Getagrip's picture

Key word is "leverage". The 08 unwind was leverage related. VXX is pricing total apathy...

TooBearish's picture

Hell ya means somepin - these fukkers will buy this thing up to year highs to make bogey ifn they all get together for an "info" dinner.  The know shorting is hard way to make it because the Open Markets desk has a bid at 10000 for all you gots - BUY EM!

Commander Cody's picture

Rather than going against the grain, I think I'll buy grain.

cnbcsucks's picture

Leverage on what side?  For stock borrows or to pump longs?


Getagrip's picture

Looks like both. The bias is the wild card..

Robslob's picture

I thought Goldman recommended selling VIX calls for September?

Robslob's picture

Better yet...maybe Hedge Funds ARE the new retail investor...

Getagrip's picture

Going the way of the retail investor/mutual fund. It's down to levered beta, better guess right...

Waterfallsparkles's picture

Looks like an HFT Feeding Frenzi.  New Money how can we eat it until it is no more.

NotApplicable's picture

I'm no quant guy, but as alpha, beta and the rest of the Greeks die off, doesn't this game of musical chairs dictate an ever rising amount of leverage in order to profit? At least until a fund's seat is taken and they blow up, that is?

I would assume this will be the only exit for the "last fund standing."

Besides, with the free-money game of front-running Fed's treasury purchases, won't it take an insane amount of leverage to get ahead as more and more try their luck?

pitz's picture

Stocks are so crazily undervalued relative to bonds, its insane for the funds not to lever up and try to capture as much value as they can.

Once again, the retail sheep will get destroyed.  Once again, people will wake up and ask themselves WTF were they thinking, selling their equities for 2% US treasuries.

Downtoolong's picture

You think this is bad, wait until Q4. Nothing says go for broke like riding ito bonus season behind the curve.



Djirk's picture

Apparently the banks are still lending to some groups...risk on!

Herry12's picture

Article is very interesting,thanks for your sharing.I will visit this site.welcome to my site!.. cheap site hosting
windows web hosting
windows vps hosting
cheap hosting

guccichanel's picture

I Love gucci and chanel. Some women do not mind buying replica handbags, while some women just love designer handbags if you can distinguish between good and bed from the replica handbag?you also can use low price get high quality enjoy?today use chanel handbag ?tomorrow carry gucci handbag?the day after tomorrow hermes handbad in your hand? this niceness all give the credit to low price?same argument you also can buy replica watches?buy DVDs louis vuitton...