Hedge funds about to throw in the towel and chase this market higher for year end?

We have continued to note the huge short position in theUS market and whic represents potential support if those bears look to bail on their losing bets.

Take a look at the chart below and you will see that the collective short position on the S&P 500 has continued to increase. This is likely being driven by hedge funds who, in another year of poor returns being posted by them and that continues to undermine their “positioning” of generating “alpha”, remain underexposed to equities. In fact, as of mid-September, it was reported that 92% of fund managers were trailing the S&P 500 year-to-date which is up around 14%, with the average hedge fund up only 6.7%.

With thee fourth quarter now upon us, these fund managers are running out of time to post impressive calendar-year results. Therefore, similar to the situation we had around this time last year, it’s quite possible that short-covering activity could occur, as deep-pocketed players make a collective effort to boost their overall equity exposure. Said another way, it could be fear that drives the next leg higher – fear of missing yet another rally.