Hedge Funds Hold Record Short Positions in Ether Futures, Raising Questions About Market Strategies
Hedge funds have set new records for short positions in ether (ETH) futures on the Chicago Mercantile Exchange (CME), sparking speculation about their motivations behind these trades.
At first glance, the growing short interest may seem to suggest that sophisticated investors are predicting price declines for the second-largest cryptocurrency. However, this interpretation may not be entirely accurate. While some of these short futures positions are indeed tied to bearish bets, the majority of the activity can be attributed to carry trades and arbitrage strategies, according to market experts.
As of the week ending February 4, hedge funds held a net short position of 11,341 contracts in CME ether futures, as reported by ZeroHedge and the Kobeissi Letter. This represents a 40% increase in just one week and a staggering 500% increase since November, according to the Kobeissi Letter.
Thomas Erdösi, head of product at CF Benchmarks, which provides reference rates for CME’s bitcoin (BTC) and ether derivatives, explained that much of the short interest in ether futures is connected to carry trades. Despite macroeconomic headwinds and ether’s relatively underwhelming performance, U.S. ETH ETFs have seen consistent inflows over the past few months, which aligns with the rise in futures short interest—indicating a potential increase in basis trades.
Basis trades, also referred to as carry trades, are strategies designed to profit from price discrepancies between the futures and spot markets. In the case of ether, hedge funds have been shorting CME futures while simultaneously buying spot ether ETFs, like BlackRock’s iShares Ethereum Trust ETF.
“Hedge funds, particularly, are active in this trade through regulated venues, selling CME Ether Futures while buying ETHA,” Erdösi said. “Additionally, Ethereum’s basis has occasionally surpassed that of Bitcoin, making ether carry trades more appealing.”
The recent surge in short interest, which has increased by about $470 million, correlates closely with an influx of roughly $480 million into spot ETFs, providing further support for the carry trade theory.
That being said, there are still some hedge funds that are placing outright bearish bets on ether. Some may be shorting ether futures to hedge against potential downside risks within the altcoin market.
“Not all hedge fund short interest is necessarily driven by basis trades—some of it may be outright shorts, particularly given ETH’s underperformance compared to other programmable settlement chains like Solana (SOL) and the broader altcoin rally,” Erdösi noted.
Further evidence of bearish sentiment can be found in ETH options on both the CME and the popular Deribit exchange, where there is a noticeable bias toward near-term put options. Put options, which allow investors to sell the underlying asset at a predetermined price, signal a bearish outlook on the market.
At the same time, long-term ETH options show a higher demand for calls, which could indicate that some investors are still optimistic about ether’s long-term prospects.
