Hedge funds are shying away from the S&P 500 index of US stocks, according to the Survey of Hedge Fund Managers by BarclayHedge, which shows only 17 per cent of hedge fund managers polled as bullish on the index, whilst 36 per cent are bullish on US debt.

The survey showed that 47 per cent of managers surveyed were bearish on stocks, up from 33 per cent in July.

“Bearish sentiment skipped sharply higher, and bullish sentiment plunged,” said Sol Waksman, chief executive officer of BarclayHedge. “Meanwhile, short interest is heaviest in the most cyclical sectors, and from a seasonality standpoint September is far and away the worst month of the year for stocks.  The developments hedge fund managers are telegraphing bode ill for equities.”

A pessimistic view has also filtered through to sentiment on the dollar. Whereas three months ago the survey showed almost half of managers to have a positive outlook regarding the greenback, August shows a more neutral outlook as attitudes are split evenly with exactly 29 per cent of managers both bearish and bullish.

Attitudes towards US debt have gone the other way with only 17 per cent registering as bearish on 10-year US treasury notes whilst bullish sentiment has risen from 14 per cent to 36 per cent in the past two months.

“Many fund managers have had their heads handed to them betting on an increase in long-term interest rates,” said Vincent Deluard, executive vice president at TrimTabs.  “Retail investors continue to exhibit an insatiable appetite for bonds—bond mutual funds have sucked in a staggering $679 billion since the start of 2009.  Mom and pop are disgusted with US equities, so bond fund inflows are bound to bloat further.”

Furthermore, around 63 per cent of managers want to see the Bush era tax cuts extended in some form. Half of managers think decreased deficit spending is warranted, whilst 18 per cent feel the US government should spend more. Almost all of the managers who prefer tighter monetary policy also prefer tighter fiscal policy.

“These ‘double’ hawks are pessimistic about the economy and stocks—only 6 per cent of them are bullish on the S&P 500,” said Deluard.

“They realize their policy prescription is too distasteful for the government and the Fed, and they fear that record deficits and exceptionally low policy rates for an extended period read a bit too much like another Greek tragedy," Deluard said.

The TrimTabs/BarclayHedge Survey of Hedge Fund Managers surveyed 104 hedge fund managers in the last week of August 2010.  

The TrimTabs/BarclayHedge database tracks hedge fund flows on a monthly basis. TrimTabs Investment Research is an independent research service that publishes daily coverage of US stock market liquidity and was founded by Charles Biderman.