At a time like this, it makes sense to short aggressively. But as we've noted often, there's a fine line between hedging and speculating, and it's quite possible that a lot of hedge funds will soon get burned.

According to Financial News, hedge funds held a net short position of 71,980 short contracts as of August 16 (according to CFTC data as parsed by Societe Generale). This is the most active shorting we've since December 2008, three months after the collapse of Lehman Brothers. At that point, hedge funds held a net short position of 85,984 short positions.

It's fair to say, there's a lot of bearish sentiment out there. One expert was quoted: "Active market participants have switched to a massive net short. They have reacted very strongly to the recent economic and political news flow. It's a very important figure. It indicates just how pessimistic hedge funds are."

It's unclear how large the "net" position is. But it would not surprise me if it is substantial. Hedge funds are also apparently still significantly long on gold right now. Some might think that such a large short position by hedge funds will in sense help lead to a downturn, becoming something of a self-fulfilling prophecy. That remains to be seen. The flip side of this is that the market might kick up a bit, causing some short covering, which leads to bigger bump in the index. So you could argue this both ways. Maybe the best bet is on the VIX.

For more:
- here's the article

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