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.