The benchmark FTSE 350 mining index, which tracks the performance of the UK's 11 biggest listed miners, is up 26 percent this year, the biggest quarterly gain since September 2009, and marking a revival after three years of losses.

Sentiment in the sector has been helped by a weaker U.S. currency, which makes dollar-denominated commodities cheaper for non-U.S. consumers and expectations that top consumer China will use further stimulus to boost its flagging economic growth.

As a result prices of commodities such as copper, used widely in power and construction, have risen 7 percent this year, while iron ore is up 29 percent.

Equity investors have jumped on the bandwagon and miners such as Anglo American and Glencore have recovered from last year's losses of more than 70 percent. Both are up around 80 percent so far this year.

Data from the Financial Conduct Authority (FCA) shows funds' net short positions in Anglo American are now at 4.5 percent from a record high of 5.7 percent on Feb. 9, Glencore's dropped to 2.5 percent from 5.6 percent in January and Rio Tinto's hit the lowest since August 2015 at 0.7 percent.

Short positions, essentially bets on lower prices, aimed to profit from slowing economic and demand growth in China.

However, fund managers doubt the rally can be sustained as demand in China, which accounts for nearly half of global use of most industrial metals, remains weak and surpluses are weighing on the market.

"It is difficult to see where you are going to get real demand growth in China," said Malcolm McPartlin, UK equities investment manager at Kames Capital.

"Only better supply and demand dynamics across markets like iron ore and copper and also confidence in Chinese demand would change our underweight position in the mining shares sector."

China, aiming to shift its economy away from manufacturing towards consumption, has been behind the recent rout in metals prices, which saw copper fall to 6-1/2 year lows of $4,318 in January.

It is also one of the main reasons why mining majors such as BHP Billiton, Rio, Glencore and Anglo American have had to take tough decisions to slash capital expenditure, dividends and sell assets.

According to data provider Preqin, 62 percent of institutional investors said that natural resources funds had not met their performance expectations over the past year and 41 percent plan to allocate less capital to the sector in 2016.

THS Partners fund manager Ali Miremadi said nothing has changed fundamentally. THS, which has a 5-10 year view, holds an underweight position in the mining sector.

"To go further from here one will want to see fundamental recovery and realistically these are very long cycles," he said, adding that the cycle will be dictated by the pace at which miners cut output to offset weak demand growth from China.

(Editing by Pratima Desai and Keith Weir)

By Clara Denina