Hedge funds short small caps most in a decade

MONEY managers are turning on stocks that have delivered the best returns during the bull market: small caps.

Large speculators such as hedge funds are betting US$2.8 billion this month that the Russell 2000 Index will fall. That's the most since 2012 and the highest versus average levels since 2004, according to data compiled by Bloomberg and Bank of America Corp. The about-face from a year of bullish wagers coincides with lacklustre performance. The gauge of the smallest companies stands 7.1 per cent below its 2014 high, trailing the recovery that has put the Standard & Poor's 500 Index within 1.5 per cent of a record.

Companies from KapStone Paper & Packaging Corp to Cardtronics Inc have climbed 20 times more than the S&P 500 since March 2009 amid faster sales and earnings growth. That's also made them expensive. Valuations in the Russell 2000 rose above levels from the 1990s technology bubble. While small-cap shares are usually the first to benefit when economic growth picks up, the selloff reflects a loss of faith by professional investors in the five-year equity rally.