Market Sentiment: short selling ETFs at the lowest level since 2001

Yet another interesting report in the Market Sentiment series that I have been writing for the past 2-3 months. This report does a good job at summerazing the last few ones, but the highlight is this new piece of information: the level of short selling in exchange-traded funds slipped to 11 percent of shares outstanding in January, the lowest level since 2001.

It's also conduct in a nice way the over-bullishness and complacency of many fund managers and market participants (see bold areas).
March 7 (Bloomberg) -- [...]

Hedge funds, largely unregulated investment vehicles that aim to make money whether markets rise or fall, took advantage of record-low interest rates to increase borrowings in January to the highest level since October 2007, according to data compiled by New York-based NYSE Euronext. Margin debt peaked in March 2000 and July 2007, before the S&P 500 began a 57 percent drop that bottomed at 676.53 on March 9, 2009.

A gauge compiled by TrimTabs and BarclayHedge measuring how heavily hedge funds are invested in stocks rose to 33 percent in January, the last month data are available, from the 29 percent average since 2000. The measure peaked at 66 percent in August 2006 and bottomed at 9.5 percent in June 2007, the data show.

Shares borrowed and sold to profit from declines dropped four straight months to 3.3 percent of all stock at the end of January, according to data compiled by NYSE Euronext.

The level of short selling in exchange-traded funds slipped to 11 percent of shares outstanding in January, the lowest level since 2001, based on data tracked by Societe Generale SA. Rebecca Cheong, an equity derivatives strategist for the Paris- based bank, said this shows hedge funds have been forced to reduce their bearish bets as the S&P 500 rallied.
“They’re playing catch-up, and equities seem to be the asset class to do it in,” Freeman
[ Mark Freeman, who helps manage $11 billion as co-chief investment officer at Westwood Management Corp. in Dallas ] said. “You have people who feel a little more certain about things moving into the market. I’m not sure how successful an investment strategy that is. The market may already be incorporating that certainty.”
The S&P 500 has risen 26 percent since Aug. 26, the day before Federal Reserve Chairman Ben S. Bernanke said in Jackson Hole, Wyoming, that “he was willing to do everything in his power” to stimulate growth. In November, the central bank announced a $600 billion plan to buy Treasuries.

Ben Funk at Liongate Capital Management LLP is sending more money to managers who are using leverage to enhance returns. Funk started to get more bullish on equities after Bernanke’s comments in August.

“We think it’s a thankless mission to try to fight the Fed,” Funk said. He is head of research at Liongate, which runs a $3 billion fund of hedge funds in London. “To be contrarian is good, but it can be painful before it works. While we respect that the U.S. is only starting to recover and growth will be uneven, we do think that over the next two to three quarters, U.S. equities, certainly relative to credit, are very attractive.”

The Liongate Multi-Strategy Fund rebounded from losses between January and August 2010 to gain an average of 2 percent in each of the last four months last year, according to investor documents obtained by Bloomberg. That gave it an annual rise of 4.9 percent, less than half the S&P 500’s gain.

Hedge funds received net deposits of $10.9 billion in January, according to Chicago-based HedgeFund.net. Assets rose 0.7 percent in January to $2.5 trillion, the firm said in a Feb. 28 report. They remain 18 percent below record levels in the second quarter of 2008.
U.S. equities are the best investment opportunity there is from a global perspective,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York, which manages $2 billion. “The biggest risk to this is complacency and the perception that everything is great. We don’t think we’re there yet. There’s certainly a new wall of worry to climb with the events in the Middle East, but the market is showing a lot of resilience.”

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