Hedge Funds Reducing Bearish Bets on Small Cap Stocks

Apr 6 2015 | 9:08am ET

Hedge funds are pulling back from bearish bets made on the Russell 2000 small-cap stock index.

Data from the Commodities Futures Exchange Commission through March 31 shows that the ratio of short to long positions in futures contracts on the Russell 2000 held by large speculative investors is at the lowest level since last April, according to media reports. 

The Russell 2000 is an index of small companies whose average weighted market capitalization is currently around $2 billion, according to Russell's website. The index hit a record in late March as traders pivoted away from larger companies with high earnings exposure to the rising dollar in favor of smaller ones.

The dollar’s surge to nearly 10-year highs has led analysts to pare first-quarter earnings estimates for the S&P 500 by 13% since the start of 2014’s fourth quarter due to this exposure. Russell 2000 companies generate more than 80% of their annual earnings domestically, compared to approximately 70% for the S&P 500. 

Large speculative investors took the opposite tack a year ago, when they shorted the Russell 2000 by the greatest margin in two years in anticipation of slowing outperformance. Small cap stocks typically do better than larger ones in the early stages of economic expansions, and lag in later stages. 

Year to date this year, the Russell 2000 is up 4.2%, versus a 0.4% gain in the S&P 500.


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