UH-OH: Look What Happened The Last Time Hedge Funds Bought Stocks This Aggressively

From Bloomberg:

Hedge funds trailing the Standard & Poor’s 500 (SPX) Index for the last five months are giving up on bearish bets and buying stocks at the fastest rate in two years.

A gauge of hedge-fund bullishness measuring the proportion of bets that shares will rise climbed to 48.6 last week from 42 at the end of November 2011, the biggest increase since April 2010, according to data compiled by the International Strategy & Investment Group.

Of course, April 2010 was right before the market hit its big mid-year slump.

Click to enlarge.


Photo: Yahoo Finance

What’s interesting is that even as pro investors (“smart money”) rush into the market, pro investors themselves are worried about what dumb money is doing.

This is from Dan Greenhaus of BTIG last night:

Conversations with clients this week focused on a number of issues. In a recent trip to Boston, clients seemed to wonder whether the increase in equity fund flows was a sign of a top, as it was in 2011’s case. Ignoring the fact that we find not discernable correlation between fund flows and asset performance, we note that domestic equity funds have seen outflows according to ICI in each of the last four weeks for which we have data.

So hedge funds are rushing in, but investors worry about inflows to mutual funds, even though that’s not really happening.

Furthermore, while there’s no relationship between retail flows and stocks, we do know that hedge funds have been famously out of step for several quarters (especially all of 2011).

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