With hedge funds shorting Ether CME futures like never before, is this an example of a carry trade or a more bearish outlook?

Hedge Funds Surge into Ether Futures Shorts: A Mix of Carry Trades and Bearish Moves

Hedge funds have dramatically increased their short positions in ether (ETH) futures on the Chicago Mercantile Exchange (CME), prompting speculation about the driving forces behind these decisions. While some observers view this surge as a sign that hedge funds are betting on ether’s price decline, the data suggests that a combination of carry trades and bearish positions is likely behind the trend.

As of the week ending February 4, hedge funds held a net short position of 11,341 contracts in CME ether futures, reflecting a 40% rise in just one week and a staggering 500% increase since November, according to tracking data from ZeroHedge and the Kobeissi Letter. This uptick has fueled discussions about the reasons behind the growing short interest.

Thomas Erdösi, head of product at CF Benchmarks, which provides reference rates for CME’s ether and bitcoin (BTC) futures, explained that much of the short activity is linked to carry trades. These trades take advantage of price differences between the futures market and the spot market, where hedge funds short CME ether futures while simultaneously purchasing ether ETFs like BlackRock’s iShares Ethereum Trust.

“Despite broader market challenges, we’ve seen strong inflows into ETH ETFs in the U.S., and this has coincided with a rise in short futures positions, suggesting that hedge funds are engaging in basis trades,” Erdösi noted. He also pointed out that the relative attractiveness of ether carry trades has been enhanced by periods where Ethereum’s basis has exceeded that of Bitcoin.

While carry trades make up a significant portion of the short interest, there are also outright bearish bets on ether, especially given its recent underperformance compared to other top blockchain assets like Solana (SOL). Some hedge funds might be using these short futures positions to hedge against potential downside risks in the broader altcoin market.

“Not all of the short interest in ether futures is tied to carry trades,” Erdösi explained. “There is definitely some bearish sentiment towards ether, driven by its underperformance relative to other smart contract platforms.”

Further supporting this cautious outlook, options data on both CME and the global crypto exchange Deribit shows a preference for put options, which are typically bought by traders who expect prices to drop. This reflects ongoing concerns about the near-term prospects for ether.

However, longer-dated ether options show a different sentiment, with a higher volume of call options, suggesting that some investors still see potential for ether to recover and perform well in the long run. This dual sentiment highlights the complexity of the current ether market, where short-term fears coexist with long-term optimism.