Hedge Funds Increase Ether Futures Short Positions: A Combination of Carry Trades and Bearish Bets

Hedge funds have significantly ramped up their short positions in ether (ETH) futures on the Chicago Mercantile Exchange (CME), raising questions about whether these actions are primarily based on speculative strategies or broader market trends.

The sharp rise in short interest has sparked speculation on social media about hedge funds betting against ether’s price. While this view is partially accurate, a significant portion of the increased short activity is actually driven by carry trades, with some funds also taking outright bearish positions on ether.

As of the week ending February 4, hedge funds held a net short position of 11,341 contracts in CME ether futures, according to data from ZeroHedge and the Kobeissi Letter. This represents a 40% jump in just one week and a striking 500% increase since November.

Thomas Erdösi, head of product at CF Benchmarks—who provides the reference rates for CME’s bitcoin (BTC) and ether derivatives—explained that much of the short interest is linked to the carry trade, a strategy that profits from price discrepancies between the futures and spot markets. Despite macroeconomic pressures and ether’s underperformance, U.S. ETH ETFs have maintained consistent inflows, coinciding with an increase in short futures positions.

“Hedge funds are actively participating in this strategy by shorting CME ether futures while buying ether ETFs like BlackRock’s iShares Ethereum Trust,” Erdösi said. “This trade has become more attractive as Ethereum’s basis at times surpasses Bitcoin’s.”

The increase in short interest, which has added around $470 million to ether futures, is largely balanced by $480 million in spot ETF inflows. This alignment of inflows and short activity supports the carry trade theory.

However, some of the short positions are likely outright bearish bets. As ether struggles against other programmable blockchains like Solana (SOL), some hedge funds may be hedging against risks in the broader altcoin market by shorting ether futures.

“Not all short interest is based on carry trades,” Erdösi added. “Some positions are purely bearish, especially with ether’s weaker performance compared to other blockchain networks.”

Additionally, ether options data from CME and the major crypto exchange Deribit indicates a preference for put options, signaling that there’s still a market sentiment that expects downward pressure on ether in the near term. A put option allows investors to sell the underlying asset at a predetermined price, typically bought by those betting on price declines.

However, longer-term options data shows more optimism, with a surge in ether call options, indicating that some investors are still bullish on ether’s long-term prospects. This split sentiment highlights the complex nature of the current ether market.