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Motley Fool – What does the turmoil in the hedge fund world mean to most investors? Losses and more losses. Over the past few weeks, the forced deleveraging of the industry, combined with redemptions by frantic clients, has led to hundreds of billions in stock sales (redemptions in the third quarter amounted to $117.3 billion, according to a new report out by HedgeFund.Net), creating horrific declines in many stocks — but interestingly, not in all stocks.
According to an equity strategist for one of the most successful fund-of-funds outfits in the country, stock holdings among equity hedge fund managers are and have been highly concentrated. Described as "crowded longs," these most-favored stocks tanked in September and October as funds scrambled for cash. Overall, equity long-short funds are down 25% year to date, according to Hedge Fund Research, compared with a near-40% slide in the S&P 500. While hedge funds have outperformed, the showing certainly is disappointing for an industry that is supposedly hedged. The shortfall is because so many managers own the same stocks, and all rushed to sell at the same time. (There were more than 8,000 hedge funds operating at the start of 2008.)
Reuters – Investors who bought protection against a Lehman Brothers default in the credit default swaps market have little to worry about getting paid on Tuesday, when an estimated $8 billion in cash payments on Lehman CDS come due.
While these payments may push a few fragile hedge funds over the edge, analysts say, stringent collateral requirements mean most protection buyers will not be out of pocket.
Comment has circulated in the markets and in the media that CDS counterparties may not be able to come up with the cash.
"The big issue is whether they (CDS) will be settled successfully," wrote ING rate strategist Padraic Garvey on Friday. "The talk is that hedge funds sold protection on Lehman … well now they will have to cough up."
Reuters Tokyo – Japanese government bond futures soared by their daily limit of 3 full points on Tuesday and 10-year yields hit a five-month low on safe-haven buying in the wake of the collapse of Lehman Brothers.
Global stock markets and crude oil prices plunged on Monday after Lehman, crushed by losses from the U.S. mortgage crisis and unable to find a buyer, sought bankruptcy protection.
"A pretty sharp increase in credit risk and worries about credit seems inevitable," said Naomi Hasegawa, senior fixed income strategist for Mitsubishi UFJ Securities.
Growing expectations that the U.S. Federal Reserve may lower interest rates at a policy meeting later on Tuesday were also giving a lift to JGBs and euroyen futures, Hasegawa said.
CNBC – Japanese government bond futures tumbled nearly a full point on Thursday, with traders citing selling by foreign funds in a move that was exaggerated by thin conditions.
September futures plunged as much as 1.14 points to 137.11 as market players suspect that hedge funds sold a large amount of futures abruptly, with other market players spooked by the move and dumping positions as well.
Traders and analysts cited a variety of reasons — including selling tied to the lead contract’s roll-over next week and flows in the interest rate swaps market — but said there was not a single trigger. "A sudden selling of futures without any big cash bond market action showed the move was highly related to hedge funds who trade purely on technical reasons," said Satoshi Yamada, a senior strategist at Nikko Citigroup.
Other market players said the sharp drop showed just how fragile financial markets are right now as damaged banks have pulled back. "Why today? Why now? Why JGBs? Who knows," said Joseph Kraft, head of Japan capital markets at Dresdner Kleinwort. "Banks are scaling back and volumes are very thin. When you see sizable selling, everyone gets out of the way." The lead futures contract fell 0.85 point to 137.50, pulling further away from a four-month high of 138.80 hit last week.
Among other reasons noted for the selling, traders said that some bond dealers may have sold futures to hedge their books before the pricing of five-year bonds issued by two utilities. Others said that commodity trading advisers, or CTAs, may have finally sold futures because of their relative steepness compared with the cash market — a trend that had stirred worries in the market that it could lead to a sell-off.
Bloomberg – Petroleo Brasileiro SA, Brazil’s state-controlled oil company, and Potash Corp. of Saskatchewan Inc., the world’s largest producer of the crop nutrient, were added to Goldman Sachs Group Inc.’s list of the most popular stocks among hedge fund managers.
The addition of the companies to the so-called VIP list, which includes the 50 stocks that are the most common holdings in hedge fund portfolios, is a sign of “strong interest in non- U.S. markets by U.S.-based hedge funds,” strategist David Kostin wrote in note to clients.
The VIP has outperformed the Standard & Poor’s 500 Index during the past 12 months, falling 6 percent as the S&P 500 lost 9.2 percent. It is the first time Petrobras, as the Brazil company is known, or Potash Corp. appeared in the index.
Petrobras’ American depositary receipts rose to an all-time high in May, spurred by record oil prices and investor interest in the offshore Tupi oil field, which the company said in November may hold 8 billion barrels of crude.
