Societe Generale’s Hedge Fund Watch is surprised at the overzealous long exposure in the S&P 500. The analysts believe that investors have hiked up long exposure in equities thus going risk-on, implying that they either do not expect a taper of QE anytime soon or they believe it won’t affect the market. The S&P 500 (INDEXSP:.INX) is trading at a multiple of 17x and is headed for a double digit correction, SocGen says.

Fed will taper in March 2014

SocGen reiterates its expectation that a delayed taper does not mean it is off the table. The analysts think that an announcement to taper could be made over the next six months. The report also mentions that consensus among analysts is that the Fed will taper in March 2014. The real downside does not come from tapering itself but the announcement of tapering, which SocGen expects will shake the confidence of investors and induce wide sell-offs.


The report goes on to mention that hedge funds are maintaining high exposure with net long positioning in S&P 500, NASDAQ1000 and short in volatility.

Fed’s asset repurchase program

SocGen recommends long exposure in USD, in light of a possible end to the Fed’s asset repurchase program. However the report notes that hedge funds have largely been sellers of the dollar. Just before the European Central Bank dramatically cut interest rates to nearly zero, hedge funds were net sellers of USD against the EUR. This bearish trend is evident in currencies other than the euro, hedge funds have also been net sellers of dollar against GBP and CHF, since Q4 kicked off.

Seller of USD vs GBP CHF

The net exposure of hedge funds in the Nikkei has also rapidly edged down over the past few months, the net longs are now at their lowest for the year. Meanwhile despite of a delay in tapering, hedge funds are still positioned on the short side of 10-year USTs and have continued to sell bonds. Hedge funds were net buyers of 30-year bonds however.

Hedge fund USTs Nikkei