It seems to me that the stock market was a much fairer playing field before we had Hedge Funds. I certainly don't fully understand all the ways they can manipulate a stock, but one thing I believe is clear, under Bush they were permitted to operate almost without regulation.
While the free enterprise system permits people, including Hedge Fund managers, to do what's legal, I really don't believe that in their creation it was ever intended that they have the power to make or break major corporations. I believe that without proper regulation, they have done precisely that.
Certainly all the problems with banks, brokerage houses, etc. wasn't brought on by hedge funds, but I don't doubt that they have created a part of the problem, and I believe that the likes of Lehman Bros were brought down by actions of such funds.
Something's seriously wrong when one hedge fund manager can receive a bonus of $7 billion. Certainly investors did very well during that year, but what had he done to earn such profits. Did he have a multi million share position in a stock, short all but a million shares in that position, and dump that million on the market to assist his short position to profit, then close the short at a healthy profit and repurchase the million plus perhaps many additional shares at bargain prices. I've heard that's the sort of things that managers of major hedge funds can do, and if they really get the ball rolling, the company just might not survive, even if fundamentally nothing was wrong.
If everything Hedge Fund Mngrs have done over the last several years is legal, then perhaps we need some new laws. I however noted companies were on the SHO list for months indicating that those who naked shorted those companies were not required to close their naked position. People kept quoting the law, indicating the position had to be closed, but it never happened and the stocks suffered.
When a company goes on one of the Russell's, the day it happens you find millions of shares trading after hours on that day at essentially the closing price that day. The MM's don't have most of those shares on hand, they go short, and often stay short for years. Effectively they're creating new stock unless they're forced to cover the short over time. Of course if they must cover the short, it will drive the price up, they'd be taking a loss on the shares they created in filling the Russell order.
It's time to put regulation back into what all these people can do. When the new Russell list is announced, the MM's either need to start accumulating stock to fill orders, or cover their shorts in a reasonable time if that's what they choose to do, either way the stock price should rise. We currently often don't see going on the Russell as positive at all because shares aren't for the most part being sold and purchased, they've being created.
Gary |
