UBS Hedge Fund Monthly Update noted a 2.8% rise in its hedged equity index, now up 11.2% YTD. Most strategies had a good month, except for CTA/quants and Global Macro, which ended the period flat, whereas Equity Market Neutral was down 0.3%.

The report also notes an increase in short exposure from U.S. equity managers, according to Prime Brokerage data. UBS points out that net exposure is edging closer to the lowest levels that were reached this year. Net exposure was at its lowest at +29% in September before ending the month at +32%.

Hedge Fund

Government shutdown caused hedge funds to sell U.S. equities

The report notes that uncertainty surrounding the government shutdown caused hedge funds to sell U.S. equities towards the end of last month. However, European equities saw the largest inflow of all in September. While inflows in the European region have been fast-paced, the market is still a long way from canceling out the massive outflows of financial crisis. Long exposure of EMEA equity managers was up from 147% in August to 168% in the last month, the highest regional activity.

Regional hedge fund flows

UBS also noted increased demand for shorting Tesla Motors Inc (NASDAQ:TSLA), and borrowed interest also rose in the case of J.C. Penney Company, Inc. (NYSE:JCP) and Sears Holdings Corp (NASDAQ:SHLD), whereas shorts in Safeway Inc. (NYSE:SWY) were covered. In an analysis published by Reuters today, Ryan Vlastelica said that investors are carefully avoiding betting on the negative side of momentum stocks like Tesla, however, it seems UBS noted otherwise. Vlastelica says that traders are being cautious as Tesla announces Q3 earnings on Nov 5.

Potash still a big short

In Europe, hedge funds continued to pile up shorts in crowded names like K S AG (ETR:SDF) (FRA:SDF) and Uralkali OAO (LON:URALL), both of which process potash fertilizers. Shares of K S have plummeted by nearly 50 percent since Uralkali announced that it is ending its agreement with a Belarusian miner; the pair controlled 40 percent of the world’s supply. Meanwhile, Russia has opened a criminal investigation against Uralkali’s CEO. K S is a short bet of Viking Global, Blue Ridge Capital and Pennant Capital.

Another European company with rising short interest is Outotec Oyj (HEL:OTE1V). The Finnish miner is a short bet of Greenlight Capital, Maverick Capital and Marshall Wace. Investors also took interest in new capital raised by Banco de Sabadell SA (MCE:SAB) and Barclays PLC (NYSE:BCS) (LON:BARC).

Chinese financials and energy under pressure

UBS noted that increased demand for shorting Chinese financials and other Asian industrials and energy players also saw spiked negative activity in the last month. The report mentioned increased borrow demand for Doosan Infracore Co Ltd (KRX:042670), China Shipping (HKG:2866), and Weichai Power (HKG:2338). In Energy, Yanzhou Coal Mining Co Ltd (NYSE:YZC) (HKG:1171) and China Shenhua Energy Company Limited (SHA:601088) are seeing more short interest.