Bond king Gross slams hedge fund managers
By Nichola Groom
NEW YORK, July 9 (Reuters) - The rising power of U.S. hedge
funds to manipulate markets through short-selling could have
devastating effects on the corporate bond market, according to
Bill Gross, head of the world's largest bond fund.
Gross, who helps manage roughly $250 billion in
fixed-income assets at Pacific Investment Management Co.
(PIMCO), said short-selling is more harmful to bonds than
stocks because fund managers are often forced to sell
fixed-income issues if they are downgraded from investment
grade to junk by the credit rating agencies.
"Knowing this requirement for forced institutional sales at
the stroke of a downgrade, hedge funds find the vulnerable (low
investment-grade companies) and begin the chase," Gross wrote
in a comment posted on PIMCO's web site.
Short-sellers borrows a security to sell and look to make a
profit by buying them back at a lower price. Because it drives
bond prices down and yields up, agency downgrades often follow
suit, forcing fund managers to sell them, Gross said.
The fates of U.S. firms, therefore, are increasingly
dictated by hedge fund activity as opposed to their own
management and lenders, Gross said.
"Corporate survival and access to capital will undoubtedly
be jeopardized because this is so," he wrote.
Gross also said bonds have been hit hard because many banks
have stopped offering short-term loans. Other fund managers
agree with him.
"The corporate bond market is a less stable place than it
was when banks were providing short-term credit support," said
Daniel Dektar, who helps invest $22 billion of investment-grade
bonds at Smith Breeden Associates in Chapel Hill, North
Carolina.
The absence of short-term lending has led to volatility in
debt spreads and asset valuations that have been reflected by
volatile credit ratings, Dektar said.
Several hedge funds have recently made billions by
short-selling bonds in companies that have been subject to
accounting probes or are being investigated by the SEC. This
has been been a more rampant phenomena since the fall of the
once high-flying energy trader Enron Corp. <ENRNQ.PK> late last
year.
Most recently, bonds of WorldCom Inc. <WCOME.O>, the U.S.
long-distance telephone company embroiled in a $3.85 billion
accounting scandal, have become fodder for hedge fund managers
after they plummeted to 15 cents on the dollar last month.
BLAME LIES WITH COMPANIES, NOT HEDGE FUNDS
However, hedge fund managers disagree with Gross'
assessment of the market, saying the funds play an important
role in rebuilding disgraced firms.
"By shorting bonds, the funds drive price discovery
reflecting more realistic market levels of pricing," said James
Hedges, president of LJH Global Investments, a hedge fund
advisory firm. "Without hedge funds leading the way, many
reorganizations and bankruptcies would drag on with glacial
progress."
Others argue the real problem lies with corporate honesty,
which is to blame driving bond prices down in the first place.
"The market is being hit because people are trying to lay
off credit risk because they don't feel safe even owning 'A'
rated bonds," said one arbitrageur. "Maybe the finger should
get placed on corporate governance."
(( Nichola Groom, U.S. Financial Markets Desk, 646-223-6300
))
REUTERS
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