Hedge Funds Most Short Into Latest All Time High Ramp Since September 2012

Tyler Durden's picture

As we have repeatedly pointed out, the one surest way to generate profits in these manipulated, broken markets is to take advantage of the one legacy trade that makes zero sense in a world in which the global central banks are the ultimate providers of downside risk protection: i.e., going long the most shorted names. We did just this most recently past Friday, when we listed the latest hedge fund long hotel, as well as the names most shorted by the "sophisticated" investors, saying "anyone going long these names is virtually assured to outperform the market over the next year." One day later and this "strategy" is already generating outsized alpha, with the most shorted names solidly outperforming the market.

And as the case may, this latest bout of "most shorted" outperformance is set to continue for one main reason. As the CFTC reported last friday, institutional investors using Standard & Poor’s 500 Index futures turned bearish this month for the first time since September 2012.

Incidentally, September 2012 is precisely when we first said that the one trade guaranteed to generate outsized returns is to go long the most shorted names. This is what happened next:

As Bloomberg reports: "Hedge funds and other large speculators have been net short for the last two weeks, wagering that the S&P 500 (SPX) will decrease in value, according to data compiled by Bloomberg and the U.S. Commodity Futures Trading Commission."

This is how the net HF exposure looks like:

Bloomberg adds:

“Everyone made a ton of money last year being long and they may be hedging their portfolios in the S&P 500 futures market,” Eric Green, director of research and fund manager at Penn Capital Management, said by phone on Feb. 21. The Philadelphia-based firm oversees $7.5 billion. “The bad economic data and the emerging-market news that broke in January have all contributed to more negative sentiment.”

Negative sentiment which, however, this time is being "explained away" with the weather. Because remember: it is never the economy's fault, and whenever we get bad data, it is the snow, or the rain, or the sun's fault. When we get good data, it is always the economic recovery, never the trillions in liquidity injected by the Fed.

Sure enough:

Investors have dismissed worse-than-forecast U.S. economic data over the past two weeks, speculating that harsh winter weather explains the weakness in reports such as housing and hiring. The Bloomberg ECO U.S. Surprise Index, which measures how much recent data has beaten or missed economists’ estimates, fell to minus 0.429 last week, the lowest since August 2011.

One would have to ignore the fact that "harsh winter weather" apparently impacted housing data in California, or that the recently reported Dallas Fed, where snow was just a little scarce this winter, also scapegoated the weather. Or that the "recovery" momentum of the entire world's macro data has reverted to multi-year lows - apparently it snowed everywhere, despite what we noted last night, namely that it was the fourth warmest January on record.

Of course, we did preface this post with "most manipulated, broken markets", so little surprise there.

As for the real reason why markets continue to surge higher:

Bearish bets against the S&P 500 shrank to 12,085 contracts in the week ended Feb. 21. Based on the price of the futures contract, that amounted to a notional value of about $5.6 billion in bets against the index.


Investors were net long S&P 500 futures by 30,000 contracts on Jan. 10, for a swing of about 40,000 contracts in the past five weeks. That’s the biggest bearish move since August 2011, when hedge funds went from being net short 4,400 contracts to net short 107,913 contracts, according to CFTC data that started in 1997. That move preceded a 9.8 percent retreat in the S&P 500 as investors sold stocks amid Europe’s government debt crisis.

In other words, every time even a modest threat of a downside correction reappears, momentum ignition across key FX carry pairs sends the Spoos and other equity indices higher triggering upside stops, which in turn forces even more hedge funds to cover short positions, once again sending the S&P too all time highs. And so on. Until the volume in the market is so low one block of E-mini futures sends the whole thing limit up, and everyone can just sit back and laugh.

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monopoly's picture

UP, UP, and AWAY we go. Fundamentals. Ha. Means Nothing.

Caviar Emptor's picture

Look these hedge funds are anti-utopian err anti-MeriKan!
All together now : came we do it? AmerrrWeCan!

slotmouth's picture

I can't wait for ZH to get into the ETF business.  I'm looking forward to the 3x leveraged long most-shorted ETF.

Emergency Ward's picture

Full margin on the the 3x Inverse Ultras ---- they don't really let you do that, do they?

DoChenRollingBearing's picture

I would not be shorting anything here, but neither do I like stocks as a buy either.

Why not just learn about and buy gold?  That covers a lot of downside.

I just read and reviewed a fine book on gold.  Author Matthew Hart wrote a lot about parts of the gold business I knew little about.  Highly recommended.

"Review of Gold: The Race for the World's Most Seductive Metal"


monopoly's picture

Have not shorted this market for over 3 years. But, at some point.......

Sudden Debt's picture

I'm pissing my pants with my shorts I bought last week....
I even sold my gold and silver calls for it...

DoChenRollingBearing's picture

Ouch!  At least you still have your physical (I hope).

I never short because QE means the House is against that bet...

Sudden Debt's picture

the physical keeps toning ;)
I'll never sell it

DoChenRollingBearing's picture

+ 1

The true meaning of: "It's for the children."

eclectic syncretist's picture

I predict this rally with end at the year high, and will be the head on a head-and-shoulders pattern that will materialize over the next couple of months.

El Hosel's picture

Sit back and laugh with the rest of the world as they marvel at the Great Ponzi Machine.

nuclearsquid's picture

Laugh?  The rest of the world is collateral damage.


TideFighter's picture

The only "Whether" that matters is whether or not this shit implodes too soon.  

El Hosel's picture

What is the least "rigged"/ manipulated trading instrument/sector? Any suggestions? My thought would be Oil, maybe grains too.

elwind45's picture

And someone to ride back to town to get a shitload of dimes for the tollbooth

maxouttexas's picture

The surge in the market today could be due to the Vodafone deal cash hitting the market.  I think the number is $80 billion in cash.

BackOffice Slut's picture



When can we expect an article about the ETF Redemption and Creation process and how much of a scam it is?

skwid vacuous's picture

Media stocks have added several hundred billion in mkt cap in the last 12 months, the pie just keeps getting bigger, must be all the dipshits watching the kardashahores, and the homo bachelor show and then twatting about it ...?  

medium giraffe's picture

Short S&P? Lol, suckerz.

TheRideNeverEnds's picture

Seriously, why would anyone ever short this market?  All it ever does is go up; its literally the law. 


Any dip is a buying opportunity and if we manage to ever again go down more than 10-15% you had better mortgage the house to buy spoos because the day yellen announces our next round of QE the ES will probably be up 100 points.   

EndOfDayExit's picture

They will not announce more QE to support stocks. Period. They are tapering cuz they have to, for all told and untold reasons.

Sufiy's picture

Gregory Mannarino: Pump and Dump Wealth Transfer Coming Soon 

  George Soros holds now 1.3 billion rolling Put on the market to protect his long positions. How long this levitation in the markets can continue? Nobody knows for sure, but this interview gives us a very good food for thought. Gregory expect the serious correction starting within next few weeks, when money after initial drop will be reallocated into Commodities, Gold and Silver. Big banks are already shorting the market and it will create the Pump and Dump Wealth Transfer again.   So far market was playing along the Toby Connor's scenario: with general equities topping in the last move up into the late spring of this year, Commodities are breaking Up and Gold and Silver are going much higher. http://sufiy.blogspot.co.uk/2014/02/gregory-mannarino-pump-and-dump-weal...

maskone909's picture

greg mannarino is a strange cat.  not sure what his history is but from older photos it appears he wore lipstick.

cosmictrainwreck's picture

"late Spring..." hmm...I'm guessing ramp to 2/28 [or midnight 2/27] normal window-dressing, but do "they" know we all suspect it and drop early, or head-fake drop and TO DA MOON March 4???

Crazy. Still wonder about mythical "blow-off top"...anybody?


monopoly's picture

And I just buy more on every dip. Dips been few and far between lately. No worries.

pragmatic hobo's picture

are these the same hedgefunds who's been going gung-ho-long on natural-gas?

TheRideNeverEnds's picture

Probably, when I got my short NG off at 5.60 I thought I was a genius and told myself I was gonna hold it till we traded back to 4.50.  


However after we tested 6.50 I was happy to cover today at 5.40; that is what I call making 20 cents the hard way...


Rest assured now that I am flat natty gas it will fall straight out of bed back to 2. 



prmths2's picture

This article is somewhat incomplete since it doesn't differentiate a naked short from a short that is hedged. For example, buying convertible preferred shares while shorting the the common shares will allow you to collect a dividend with greater safety. This was the case with Calpine prior to bankruptcy.