By Staff reporter

Hedge funds are backtracking on bets against European stocks at the fastest pace in three years.

The funds are speculating that policy makers will step up the fight against the debt crisis and the degree that macro funds are trailing the Euro Stoxx 50 is narrowing at its fastest rate since 2009, a gin that managers are covering short sales by buying shares.

Data compiled by JP Morgan Chase and Bloomberg shows the proportion of shares on loan in the Stoxx Europe 600 Index, an indication of short interest, has fallen to 2.9% from 3.4% in May.

As a result, bulls say professional investors are fuelling a rally led by European Central Bank president Mario Draghi’s pledge to defend the euro with the Euro Stoxx 50 up more than 12% in three weeks, twice the gain of the MSCI All-Country World Index, even as the euro-area economy is forecast to slide into recession.

Hedge funds last closed short bets this fast in April 2009 just before a 35% rally in the Stoxx 600. Macro funds have failed to keep up with the market this year, rising 0.1% compared with an 8.1% advance in the MSCI World Index of equities in developed economies, according to the Bloomberg data.

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