Hedge Funds Not Betting On Default

Oct 16 2013 | 2:13pm ET

The U.S. government is just hours away from a possible default on its debt, but hedge funds aren't biting.

Short interest in the Standard & Poor's 500 Index and its constituent stocks is at a six-year low, Markit reports, indicating that speculators do not expect the financial catastrophe that could follow a default. And the market set to be most affected—that in U.S. government bonds—isn't offering much of a premium for taking on the risk of a potential default.

"We did the math on the investment," the chief operating officer of a large hedge fund told The New York Times. "You could buy $2 billion of these bills, and you would only make $200,000."

The risk of default seems to be ebbing: A bipartisan deal was reached in the U.S. Senate today that is expected to pass quickly before the country hits its debt limit at midnight. The deal will reopen the government after more than two weeks and raise the debt ceiling until February—without any of the concessions sought by Republicans.

"Most people seem to be sitting and watching because going down the abyss seems too unimaginable," another hedge fund executive told the Times. Bank of America Merrill Lynch analyst MacNeil Curry concurs, telling the newspaper, "there's not a lot of evidence to say hedge funds are trying to short the market. It's more that people are stepping aside to watch it play out."


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