At a time when the hedge fund industry’s many larger-than-life billionaires would normally be making bold bets, they are largely sitting on the sidelines.
The United States government is edging precariously closer to a default, an event that world leaders have warned would cause widespread disruption on markets around the world. It is the kind of potential for turmoil that hedge fund managers often view as ripe for exploitation.
But in the equity markets, where hedge fund managers usually express their pessimistic views by betting against a company or the Standard & Poor’s 500-stock index as a whole, such bets are at a six-year low. The data, provided by Markit, is measured by the total amount of short positions - or percentage of a company’s shares that are out on loan.
Investors take a short position by borrowing stock in a company and then selling it, anticipating they can make a profit by buying that stock back later at a lower price.
“There’s not a lot of evidence to say hedge funds are trying to short the market,†said MacNeil Curry, an analyst at Bank of America Merrill Lynch. “It’s more that people are stepping aside to watch it play out.â€
Many hedge fund managers have chosen not to take sides in a political impasse that is viewed by some on Wall Street with a little skepticism.
“I never thought that was in the cards. Treasury default? I mean that would be catastrophic,†said Bradley H. Alford, who invested in hedge funds while he was at the Duke Endowment in the 1990s. He now oversees a mutual fund firm.
“Most people seem to be sitting and watching because going down the abyss seems too unimaginable,†said a hedge fund executive who spoke on the condition of anonymity.
Even though few investors believe the government will default, no one is taking any chances.
“Making big tactical calls based on the government is more like gambling than it is investing,†Mr. Alford said. “We’d fire a manager if we found out they were making big bets based on politics.â€
In the debt markets, where investors have been selling short-term Treasuries on concern that the government will not be able to make payments if Congress fails to come to an agreement by Thursday, some hedge fund managers have said any payoff in buying discounted Treasuries is not worth the effort.
“There is always going to be a story about someone who makes money on this,†said the chief operating officer of a hedge fund that has more than $15 billion in assets under management, who spoke on the condition of anonymity.
One way would be to buy one-month Treasury bills, he added. The paper, which has several maturity dates including one on Thursday, is trading at discounts to the value that the government would pay, assuming the government can make the payment.
“We did the math on the investment - you could buy $2 billion of these bills and you would only make $200,000,†the manager said.
