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CNBC: Hedge Funds Eager to Short Rising Stock Market

By Michael Kling   |   Thursday, 21 Nov 2013 07:33 AM

The enthusiasm hedge funds are showing for shorting stocks could be a sign of an impending downturn.

Many hedge funds see a fabulous opportunity in shorting the market, or betting that stocks will drop, as the market continues to reach new highs and warnings of an impending bubble proliferate, according to CNBC.

"This is it. It's the bottom of the ninth and we're about to hit a home run," John Fichthorn, co-founder of Dialectic Capital Management, told CNBC. "I believe this is the best opportunity I will see in my life as a short seller."

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"The quantity and quality of short signals, especially in large caps, have not been this robust since late '06 or early '07 — the period that preceded the last recession," Matt Kliber of Gracian Capital told CNBC. "The evidence of revenue strain and earnings risk among large companies is not fully reflected in consensus estimates."

But for now, just surviving is a challenge for many hedge funds, CNBC noted, adding that hedge funds specializing in shorting stocks have shut down in the wake of the rally. Many shut down after Common Sense Investment Management, a top short allocator, collapsed when its founder Jim Bisenius was charged with soliciting a prostitute.

Hedge funds specializing in shorts were down 16.9 percent this year on average, according to eVestment data cited by CNBC.

"The past several years have been challenging for short-biased funds, owing primarily to quantitative easing [QE] and the resulting surfeit of liquidity-creating valuation distortions," Scott Schweighauser, president and portfolio manager of Aurora Investment Management, a short allocator. "That being said, Aurora believes that investors are now incorporating the view that QE will soon diminish, and are, therefore, recalibrating their own expectations with more realistic cost-of-capital assumptions."

That will open better "alpha opportunities" enabling top managers to extinguish themselves, he said, noting that shorts have produced better returns the last six to eight weeks.

"Anyone with a brain I think can tell that there's a tremendous opportunity setting up on the short side," hedge fund manager Bill Fleckenstein, president of Fleckenstein Capital, said.

"Exactly when that's going to happen and will you be able to capture it well are different issues. But there's just no doubt about it. If you think that all this is all going to end well and there isn't going to be a spectacular collapse at some point in the coming year, plus or minus, then you really are naive."

However, there is a wave of new hedge funds that concentrate either mostly or exclusively on long positions, including Tiger Global Management, Coatue Management and Judson Founders Fund, The Wall Street Journal reported.

"We're seeing a big movement and we think it's going to continue," Joseph Larucci of Aksia, a hedge-fund consultant, told The Journal.

But others think the new hedge funds are merely late to the stock rally and that the trend may be a sign the market is peaking.

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