Traders play to win, and hedge funds are unconstrained by big-firm considerations, like turning your clients into your next meal is probably not a good strategy for long-term survival. But even then, brokers are widely believed to play dirty. Hedge funds avoid revealing their positions to their prime brokers (funds of any size have two or three so no one has a very good view of their activities) precisely because they assume their PB will trade against them.
Hedge funds have long shown few compunctions about taking ailing competitors down. In the Long Term Capital Management meltdown, the firm had become so big in so many markets that it quickly became obvious that it had turned into a distressed seller, and its situation became only more desperate as traders moved against it.
The Financial Times reports we are seeing more of the same. And while inevitable, hedge fund woes will only make the credit crisis more acute.
From the Financial Times:
Hedge funds are embracing trading strategies designed to profit from the unwinding of large positions by their competitors, market participants say.
The increasingly cannibalistic activity stems from the wave of redemptions hitting hedge funds.
Because so many firms hold similar positions, forced selling by one in response to redemptions can have ripple effects, forcing other funds to sell.
More nimble hedge funds have sought to profit from the dynamic by taking short positions in securities known to be widely held by rivals. Goldman Sachs publishes a list of 50 “very important” hedge fund positions.
In its Wednesday update Goldman said: “Forced selling to cover redemptions and deleveraging . . . has put downward pressure on selected stocks.”
A favourite strategy of hedge fund managers during the bull market – mimicking the positions of others – has been turned on its head, Goldman said. “Buying the most concentrated stocks . . . has been a poor strategy during the current bear market.”
The announcement last month that Ospraie Management was winding down its flagship fund encouraged predatory activity.
One Hong Kong-based manager sent a note urging friends to short emerging and mining shares favoured by Ospraie.
Some hedge fund managers say they have been monitoring the positions held by Ospraie, if only to be ready if other funds with the same positions are forced to liquidate their holdings…
Firms are also monitoring Deutsche Bourse because of a big position in its shares held by Atticus, which has told investors in its main hedge fund it is down 25 per cent so far this year.
Greenlight Capital, the hedge fund run by David Einhorn, told investors in a letter on Wednesday it was down 17 per cent so far this year, in part because “investors have been unwinding trades that they otherwise believe make sense”.
The FT mentioned Einhorn as a once high-flier now on the ropes; Bloomberg lists some other firms showing serious deterioration in performance:
Maverick Capital Ltd., Greenlight Capital LLC and The Children’s Investment Fund Management LLP fell more than 12 percent in September as stock hedge funds posted record monthly losses and braced for client defections.
Lee Ainslie’s Maverick Capital declined 19.5 percent and Greenlight Capital, run by David Einhorn, was down 12.8 percent, according to investors in the New York-based funds. Children’s Investment, overseen by Chris Hohn in London, fell 15 percent, based on a preliminary estimate.
Stock hedge funds fell an average of 8.6 percent in September, the biggest one-month loss since Hedge Fund Research Inc. began collecting data in 1990. While that was better than the 12 percent decline by the MSCI World Index, a benchmark for global stocks, industry analysts expect investors to increase their requests to pull money from funds…
Other managers with above-average losses for the month included Stephen Mandel, whose main Lone Cyprus fund in Greenwich, Connecticut, fell 14.7 percent. New York-based Third Point LLC, run by Daniel Loeb, dropped 11 percent….
Managers including DKR Capital Partners LP in Stamford, Connecticut, and London-based RAB Capital Plc restricted redemptions on some funds so they aren’t forced to sell assets at a loss to pay off investors. RAB Special Situations, down 15 percent in September and more than half this year, won investor approval on Sept. 30 to delay redemptions for three years in return for a cut in fees. DKR SoundShore Oasis Fund restricted redemptions after it received requests for withdrawals totaling 27 percent of its net asset value. Guy Wyser-Pratte suspended withdrawals from his $500 million Wyser-Pratte Eurovalue Fund.
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With Zimbabwe’s inflation estimated near 531 Billion Percent, you can see the central bank(s) never really goes broke because they can just keep on printing and adding zeros. The people are the ones that suffer and go broke. Holding any amount of time and the currency is losing value.
Inflate to infinity and die anyway in real time.
Matt Dubuque
As Willem Buiter pointed out in an extended exposition in his recent Jackson Hole paper, excessive leverage is playing a critical role in this entire debacle.
I have no objection to free market players capitalizing on the mistakes of others using clever strategies described in this piece.
What I DO object to however is their use of HYPERleverage to obtain their aims.
Because of the very large sums involved here, such highly leveraged plays only serve to amplify the degree to which we will overshoot the fair and reasonable clearing price for risk on the downside.
Such an overshoot is in itself destabilizing.
When Buiter and Bernanke agree on something, it seems likely that it is worth taking under advisement. Both of them view a fundamental cause of the mispricing of risk to be excessive leverage.
As Yves seemed to implicitly point out yesterday (and please forgive me if this is a mischaracterization of her view) when she raised legitimate concerns about the methodology used in regulating tightly coupled systems, we need relatively stable markets in order to commence with the massive price discovery to follow.
The use of hyperleveraging is inconsistent with the sound policy objective of the repricing of risk within a relatively liquid and stable process.
Matt Dubuque
mdubuque@yahoo.com
So, financial predators and parasites, having cannibalized the actual productive economy of the US over the past 30 years, now have no choice but to cannibalize each other.
It points out the fundamental need to free the republic from the stranglehold that finance capital has held the country in for the past generation, starting with the bankruptcy of NYC in 1975, aka The Banker’s Coup. It was this event that presaged the dominance of the neoliberal regime and serial credit crises to come. Now, as a result of their infinite greed and arrogance, we will see a Final Offensive of structural readjustment, privatization – already announced in Thursday’s New York Times, in an article buried in the back of the Metro section announcing that Governor Patterson is exploring the sale of state assests – and widespread immiseration.
While Marx’s prescriptive powers left much to be desired, his powers of description – namely, the inherent tendency of capitalism to generate crisis – remain prescient.
Does anyone know where to track down said list?
So ironic that David Einhorn is featured in this, given his book about shorting Allied.
http://www.amazon.com/Fooling-Some-People-All-Time/dp/0470073942
Do buy and hold strategies still work when speculation seems to be the norm
Should we be surprised that Einhorn’s fund is down?
Reading between the lines here, parasites such as Goldman, also Prime dealers of the FEd, may have knowledge of their book.
Why not ‘punish’ him for ‘causing the downfall of Lehman?’ It was ALL his fault don’t you know.
These bankers are a heinous breed, and it wouldn’t shock mee in the least if they were out to destroy those that they perceive were crossing them.
As sad as it is, 2 bankers in Britain were either killed or commit suicide recently. When $$$ is involved things can get terribly ugly when people lose their shirt.
The depravity of man is on display.