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I've been telling you for weeks that hedge funds have been sucking wind, partly due to too often plowing into the same trades then exiting them too late.
But I've also been telling you that they're ready for a comeback…
Whether they're able to continue their recent burst of positive performance doesn't matter to us, unless of course you're in any of those floundering funds.
What matters to us is what positions they're into now and when they'll unwind them.
Because knowing what we know about their positions we can front-run their exiting strategies by putting on smart risk/reward reversal trades.
Here's what they did, what they're going to do, and how to front-run them before they rush for the exit doors.
How Hedge Funds Won Big on Trump's Victory
Before the election, hedge funds got "long" (meaning they bought) the S&P 500 by buying S&P 500 futures, got long copper by buying copper futures, and shorted (bet prices would fall and yields would rise) U.S. Treasury bonds by selling bonds short.
Going into the election, per ValueWalk, hedge funds were long equity futures, "Not just a little long. But positive on the market to the tune of $24 billion in the S&P 500 futures from Oct. 25 to Nov. 8 – the largest hedge fund long position since the last mid-term elections when Republicans made gains in Congress."
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That analysis from ValueWalk came from a Bank of America Merrill Lynch report authored by the global market analysis team of Jue Xiong, Stephen Suttmeier, and Paul Ciana, who calculated the net long position in the futures by culling Commitment of Traders data from the Commodity Futures Trading Commission.
To hedge their long S&P 500 exposure, some funds shorted tech stocks based on how much they'd already run-up and that Mr. Trump's campaign rhetoric would result in reduced "globalization," knocking tech darlings in the process.
When Trump won, an immediate freak-out tanked futures on very thin volume (fueled by some panicked selling by long-positioned funds). But then, to the great relief of long-positioned traders, selling dried up and buyers reversed futures losses by the time U.S. equity markets opened on Wednesday morning.
With the panic apparently over, traders who took on big short positions in anticipation of a sell-off if Mr. Trump won scrambled to cover their shorts.
Very quickly, sidelined institutions – who had reduced their longs and hedged some of their remaining long equity exposure by shorting $3.3 billion worth of S&P 500 futures – covered their short futures trades and began to buy back shares they'd dumped and even bought futures to get longer in front of unexpectedly rising indexes.
Lots of hedge funds nailed the action. The S&P 500 soared and tech stocks tanked.
Besides going long equities, hedge funds shorted Treasury bonds, betting a Trump victory – with its big infrastructure spending plans and a debt ceiling vote coming up in March – would put huge upwards pressure on interest rates, even before the Fed would have to raise in December, and crush bond prices.
Fund managers who shed Treasuries, resulting in outflows of $11.5 billion in the two-year note and $1.3 billion in the 10-year note, continue to reap rewards for betting correctly that bond prices would fall precipitously.
Many CTA and CPO (managed futures) funds put on another type of hedge fund trade intended to make money if Mr. Trump won: a bet that a spike in copper prices would accompany his trillion-dollar infrastructure promises.
By Nov. 8, CTAs and CPOs had increased their net long positions in copper by 25.3%. That futures buying moved copper past certain standard deviation-based trading range parameters, attracting more momentum buyers.
Hedge funds got that bet right big time. When Mr. Trump won, copper prices soared.
Now that the quick money's been made, at least on paper, lots of traders are going to want to close out their successful trades to book profits, which they desperately need.
With market-moving "Trump Trades" already a week old, a lot of traders are sitting with their fingers on the sell button, ready to lock in their profits if more somber assessments of Mr. Trump's prospects of fulfilling his campaign promises get muted in political realities.
That's where we come in.
How to Profit from the Hedge Funds' Next Move
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.