Hedge funds’ renewed interest in gold with the strongest net long positions in over two years could prove to be a costly strategy when the Fed actually tightens its policies, suggests Societe Generale. Alain Bokobza and the rest of the team at SocGen’s Global Asset Allocation published their “Hedge Fund Watch” report after tracking hedge fund positions across asset classes, performance and favorite strategies.

Brent will fall to $40

According to the SocGen analysts, hedge funds are still hugely long on oil, though SocGen’s commodity strategists anticipate that Brent will fall to $40. The following table depicts hedge funds’ commodities positions:

Commodities positions Hedge Funds

As set forth in the following graph, the SocGen analysts note the sharp drop in copper prices was correctly accompanied by historically strong net short positions.

Historical net short positions on copper Hedge Funds

The analysts believe hedge funds’ renewed interest in gold with the strongest net long positions in over two years could prove to be a costly strategy when the Fed actually tightens its policies.

Gold positions Hedge Funds

The following graph highlights the commodities on which hedge funds are particularly positive or negative:

Hedge funds views on commodities

According to the SocGen analysts, the market has pushed back on Fed guidance and the view of most Fed watchers concerning the probability of the first rate hike coming this summer, as evidenced by the huge shorts at the long end of the UST curve since summer 2014. The analysts are surprised that hedge funds remain somewhat net short on long dated bonds.

The analysts point out that being buyers of 30-year Treasuries for the better part of 2014, hedge funds were correctly positioned for the drop in long term interest rates as well as for the ensuing flattening yield curve.

30-year T-bond yields Hedge Funds

Positive on equities

The following table captures hedge fund positions on equities:

Hedge Funds positions-Equities

Alain Bokobza end the rest of the team at SocGen point out that doubts about financial risks associated with huge Bank of Japan injections have led hedge funds to turn net short on the Nikkei for the first time in two years. The analysts also point out that they switched to an underweight position on Japanese equities in December despite a continued bearish view on the yen.

Additionally, the analysts note a return to net long VIX rimes with hedge funds willing to hedge their ultra-long positions on equities:

Hedge Funds' conviction on asset classes