Did hedge funds buy the dip?

One question I had on my mind, what are hedge funds doing in these market conditions? 

We are fortunate enough to be able to see what the hedge funds get up to on a weekly basis. Although the data we receive is from the week previous, it can be useful information. 

If you are unfamiliar with hedge fund positioning then we can have a look at the Commitment of Trader reports. This report from the CFTC is released every Friday, telling us the latest positions in the futures market. They include currencies, metals, indices, commodities and many more. 

Seeing this data can be helpful to back up any trade ideas you have or can help you decide how much risk you may apply. 

For instance, if I see that GBPUSD is in a strong upward trend and I want to buy into it I can look at the latest CFTC reports to see how the big players are positioned. If they are extremely long, then I know there's a possibility that the trend could be coming to an end. So, in that instance I can lower my risk, as the chance of a reversal is higher. 

This is an example of a report we can receive from the CFTC. As you can see this report is fairly hard to read, but you can clearly see that it says non-commercial (hedge funds and large speculators) long and short contracts and the changes from the previous week. 

All the data we need is here, but if you’re new to them they can seem daunting and in this format pretty useless. Fortunately for us there are many free services that we can access to get the reports. 

Some FREE CoT reports:

• cot-reports.com is a very simplified format of the CoT reports, but they put it in an easy to read format. Highlighting the changes in the net positions from hedge funds, and colour code it in a way that tells us if they are long or short. 

• My favourite free site to use is barchart.com (https://www.barchart.com/futures/cot-reports/indices?view=noncommercial&report=summary) not only can you get a detailed and simplified breakdown of the reports, but you can also see the historical numbers on a line chart as an indicator. These are the reports we will be using today. 

Where are hedge funds positioned in currencies?

Let’s break some of these numbers down:

USD: we can see that the large speculators have been decreasing long and short positions, but remain net short with the net change for last week change being -4,128 contracts. This tells us that hedge funds are still short USD right now, no extremes have been reached as of yet. 

GBP: well a contrast here for the British Pound vs other currencies as hedge funds really begin to ramp up selling. Hedge funds decreased their long positions by -13,253 whilst increasing their short positions by 4,063. They are net short -17,316 for last week, and this was seen across the board with GBP losing out to most other currencies. I like GBP shorts still, I managed to short GBPCHF recently and still like this market lower as well as EURGBP longs.

JPY: hedge funds are still holding extreme long positions on the Japanese Yen. They are at a 52 week high, this can often lead to short term pullbacks, but in these conditions the JPY will probably continue to benefit. 

CHF: the Swiss Franc continues to strengthen as it feels the safe haven flows more than most as markets anticipate further rate cuts from the central bank. We may even see some form of intervention from the SNB or a return back to negative interest rates. A stronger CHF could negatively impact Switzerland’s economy, it also makes imports cheaper. This on paper sounds good, but if prices fall too much it can lead to deflation, which is when prices drop. A central bank does not want this. 

Where are hedge funds positioned in Indices?

It may come as no surprise that hedge funds added long positions into the likes of the Nasdaq. Major US indices have fallen significantly, with the Nasdaq falling over 25% from high to low. Hedge funds will often play the ‘long game’ and have the capital to swallow another market drop, which is to be expected.

When you look at the the positioning on the other US indices including the Dow Jones and the S&P500, we can see they are still weighted more negatively. So, are hedge funds, well, hedged? It would make sense considering the volatility of the markets and the uncertainty on tariffs still. 

So that’s how some of the hedge funds are shaping up. The British Pound of GBP selling makes sense for me considering the expected poor data to come, GBPJPY in particular could be one to watch.

The price of GBPJPY is trading below the key resistance of 189.50, if it can remain below here it could signal further downside. Sellers could target the 2024 lows around 183.00. I will be watching the price action at the higher levels to see if any selling opportunities appear. 

I hope you have a good trading week!