Hedge funds turn bearish again as yields spike

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NEW YORK (Reuters) – Global hedge funds increased their bets that stocks will fall in a week when bonds yields rose after the United States’ credit rating was downgraded, a Goldman Sachs report on Friday showed.

Hedge funds added 4.6 short positions to each long position from July 7 to Aug. 3. “After three straight weeks of risk unwinds, the overall prime book was net sold on the week,” the report said.

Hedge funds were forced to partially unwind short bets in July to avoid further losses during a market rally triggered by better-than-expected corporate earnings.

The rally was interrupted this week after credit rating agency Fitch downgraded the U.S. ahead of an expected flood of Treasury supply in the third quarter. Higher yields can reduce the appeal of stocks.

Both the S&P 500 (.SPX) and Nasdaq Composite (.IXIC) registered their biggest weekly declines since the week ended on March 10, with losses of 2.27% and 2.85%, respectively.

Goldman Sachs, as one of the biggest providers of lending and trading services through its prime brokerage unit, can track the movements of large hedge funds and asset managers.

The bank said its clients are placing bearish bets mainly through indexes and exchange-traded funds, not using particular stocks.

Equity long/short hedge funds have been vocal about the challenges of being bearish this year, as they were caught off-guard by a rally. Their performances have been hit by the losses with short positions.

Billionaire investor Daniel Loeb said in a letter on Thursday he had decided to trim his short bets to limit the vulnerability of his hedge fund, Third Point.

Investors were more bearish on North America and Asia, driven by Japan, and more bullish on Europe.

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