Short squeezes hit hedge funds

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Bloomberg Businessweek reports that hedge funds are increasingly closing out bets against the U.S. economy "after four years of giving their clients subpar returns."

It notes a measure by International Strategy & Investment Group, which measures the extent to which hedge funds are making upward bets. The survey index rose to 47.3 at the end of 2012 from 43.9 a year ago and is near its 52-week high of 48.1, hit in August. A score below 50 still suggests a bias toward short bets.

As hedge funds close out short positions, heavily shorted stocks are gaining, pumping up the rally. Indeed, the 20 stocks with the highest short sales in the Standard & Poor's 500 index rose an average of 5.1 percent in December, compared with 0.7 percent for the full gauge, according to a Bloomberg analysis. But is this covering a longer-term phenomenon, or is it a real switch to a more bullish stance?

It's hard to call. The fact is that hedge funds sorely disappointed in 2012 from a performance point of view. They perhaps should ponder a switch, and swallow their pride.

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