Hedge funds 'behind wild market gyrations'
NEW YORK - As traditional buy-and-hold investors flee the worst stock market in a generation, hedge funds have moved to the fore, deploying riskier and more exotic trading methods.
The result is a highly skittish market, prone to bursts of buying and selling that whip prices into sharp swings, according to traders and brokers.
Hedge funds 'are the most active participants right now', said Mr Bruce Turner, head of equity trading for CIBC World Markets. 'When the market moves, they're behind it.'
Last Wednesday, for instance, the Nasdaq Composite Index swung from a 3 per cent loss in the morning to an almost 5 per cent gain by the close of trading.
As the same time, the Chicago Board Options Exchange (CBOE) Volatility Index, also known as the 'fear gauge', surged to 56.7 as early selling peaked.
That was just a whisker off the reading of just over 57 at the height of the selling immediately after the Sept 11 terrorist attacks.
Loosely regulated hedge funds can exploit a wide range of investment techniques, such as short-selling and trading of stock futures.
Because they typically manage a few hundred million dollars, instead of mutual funds' billions, they are more nimble and can place and unwind positions more quickly. Staid mutual funds, on the other hand, are allowed to use only a few techniques and are constrained by their size and strict mandates - such as investing for growth or value.
Hedge fund transactions account for as much as 50 per cent of the daily puts and calls on the CBOE, stock traders at top Wall Street firms said, compared with about 25 per cent a year ago.
Traders also say as much as 40 per cent of buy and sell orders on stock exchanges are placed by hedge funds.
Their influence is stunning, given that hedge funds hold a mere US$550 billion (S$972.4 billion) of assets, compared with mutual funds' assets of about US$7 trillion, according to industry association data.
And when the market does turn sustainably higher, expect hedge funds to lead volatility on the upside as well, investors say.
'Hedge funds are momentum players - they have their computer trading programs and, bang, they keep putting them in and it exacerbates the direction of the market,' said Mr Brian Finnerty, a strategist at money management firm Melhado, Flynn.
'But that's why rallies are incredibly strong as well.' --Reuters |
