Hedge funds are cranking up their bets in equities and credit in 2012's buoyant markets in the belief that the euro zone, US and Chinese economies will fare better than many were fearing last year.
Many funds think the European Central Bank's long-term refinancing operations (LTRO), which flooded markets with €489 billion of cheap cash in December and provide more this month, are a turning point in propping up the region's battered banks.
They are also betting that China, which is facing a fifth successive quarter of slowing economic growth, will experience a so-called "soft landing", while the US, which saw its fastest growth in one-and-a-half years in the fourth quarter, is firmly on the recovery path.
The average hedge fund rose 2.6 per cent in January but this was behind the S&P's 4.5 per cent gain, according to Hedge Fund Research, and some funds missed out on the rally after taking a cautious stance towards the end of a turbulent 2011.
Many managers are now hiking borrowing to make their favourite bets punchier, or shifting the balance between their long and shorts to help them profit from market gains.
"What we're hearing from a number of managers is that the appetite for risk has risen," said Frank Frecentese, global head of hedge fund investments at Citi Private Bank.
"Their view on Europe is that the possibility of an extreme left-tail event has lessened, the US is doing moderately better than expected and the risk of China ... heading for a hard landing has lessened."
The FTSEurofirst 300 of top European shares is up 8.3 per cent so far this year.One London-based hedge fund manager said he had cut his gross long equity position to around 80 percent by the end of last year.
However, in early January he raised this to 120 per cent and plans to take it up to a long-term average of 130 per cent in the next few weeks.
Reuters
