Hedge Funds Pick On Each Other
The good news: Hedge funds are sitting on a growing pile of cash that eventually will make its way into the market. That could push prices higher.
The bad news: It could take months before this happens. Until then, hedge funds likely will continue to pick on each other, potentially forcing more funds to fold and adding to the market's angst.
On the face of it, things aren't that bad. Overall, hedge funds have lost less than 5% this year through August, well below the 12.6% loss of the S&P 500-stock index. Only a few notable firms, such as Ospraie Management and Andor Capital, have closed down funds, even as Lehman Brothers falls and financial giants totter.
But there are indications that the pain is getting more intense. Funds sense they can make money from the pain of their brethren, so they are dumping or shorting popular holdings of other hedge funds, betting that other hedge-fund managers will have to also sell these shares to avoid heavy losses.
AK Steel and Freeport-McMoRan Copper, each popular hedge-fund holdings, have dropped 21% and 10%, respectively, this week. Other favorites, such as Calpine and Focus Media, are down more than 24% since late August. Expect more such sharp falls among hedge-fund favorites.
The selling could end in early December, when it is clearer how many investors want to redeem their hedge-fund positions by year's end. Until then, however, more funds could throw in the towel, while others likely will remain wary of taking big positions.
That could weigh on stocks.
Gregory Zuckerman |
|
