Bullish hedge funds hike their bets in 2012 rally

Mon Feb 20, 2012 10:02am EST
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By Laurence Fletcher

LONDON (Reuters) - Hedge funds are cranking up their bets in equities and credit in 2012's buoyant markets in the belief that the euro zone, U.S. 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 euros ($644 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 U.S., 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 percent in January but this was behind the S&P's .SPX 4.5 percent 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 favorite 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 U.S. is doing moderately better than expected and the risk of China ... heading for a hard landing has lessened."

The FTSEurofirst 300 .FTEU3 of top European shares is up 8.3 percent so far this year.   Continued...