Hedge funds are getting increasingly skeptical about this big rally that broke out in the middle of a bear market.

Net short positions against the S&P 500 futures by hedge funds have reached a record $107 billion this week, according to calculations by Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas. Shorting the S&P 500 futures is a common way to bet against the broader stock market but also could be part of a hedging strategy.

The bearish bets accumulated as the S&P 500 rallied for four straight weeks, bouncing more than 17% off its 52-week low from June 16. Economic data pointing to easing price pressures firmed the belief that Federal Reserve is getting inflation under control.

"As powerful as the market rally has been, it is being viewed with substantial skepticism," said Mark Hackett, Nationwide's chief of investment research.

Given the massively defensive positioning, some hedge funds have been forced to cover their short bets as stocks continued to go higher, further fueling the rally in the near term.

Since the S&P 500's June low, short sellers ended up covering $45.5 billion of their short positions, according to S3 Partners. The largest amount of short covering in dollar terms occurred in the consumer
discretionary and technology sectors.

"This may indicate that institutions are looking at the recent upward market movements as a 'bear rally' and are expecting a pullback in share prices across the broad market if the recession continues or worsens and the Fed is forced to raise rates higher or quicker than expected," said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

Many on Wall Street believe that signs of peaking inflation data may not be a sufficient catalyst for the rally to have any lasting power.

"We think we would need to see a larger and more persistent improvement in the macro outlook, to drive a larger scale reallocation of institutional money back into equities," Boutle said.