Recent Historical context..........
WALL STREET ROUNDUP
Record short sales defy market rally
By Tom Petruno, Times Staff Writer
May 22, 2007
Bearish bets on the direction of stock prices hit a record on the New York Stock Exchange this month, even as the market has continued to streak higher.
The number of NYSE-listed shares sold "short" climbed to an all-time high of 11.76 billion shares as of May 15, up 7% from 10.99 billion in mid-April, the NYSE said Monday....
http://www.latimes.com/business/investing/la-fi-wrap22.2may22,1,7441418.story?coll=la-headlines-busi....
...The NYSE composite stock index has surged 10% since mid-March, yet the number of shorted shares has risen nearly 12% in the period...
..."The more hedge funds you have, the more interest there is in shorting," said Bill Strazzullo, a partner at Bell Curve Trading in Boston....
...Whatever the reason for a rise in short sales, the borrowed stock eventually must be replaced. Buying to close out those trades can help boost the market, noted Todd Salamone, an analyst at Schaeffer's Investment Research in Cincinnati.
"At some point they have to unwind those trades. That creates buying pressure," he said.
Fundamentals
May 25, 2007 2:00 pm
If Hedge Funds Go Out of Favor...
David Miller
It used to be that big pension funds invested in mutual funds. The pensions were charged small fees and the mutual funds directed the money almost exclusively to long-side investments. Over the last few years, the rise of hedge funds as an alternative investment vehicle has attracted or, some say, been driven by pension managers feeling comfortable shifting money from mutual fund to hedge fund.
Theoretically, the pension manager can use hedge funds to beat the market and capture outsized returns by investing in a vehicle that can be both long and short stocks. Theoretically, such a strategy insulates the pension from market risk because of the short component of the hedge fund strategy. However, all of this comes at a stiff price. Instead of the single-digit management fees charged by most mutual funds, typical hedge fund fees are 2% money under management and 20% any profit made....
http://www.minyanville.com/articles/Hedge+Funds-Equity-Mutual+Funds/index/a/12883
...Imagine a pension fund shifts $5 bln from a mutual fund to a hedge fund. First, that mutual fund has to sell positions in order to raise cash for the redemption. This depresses stock prices. Hedge funds that are popular with pensions usually invest 60/40. 60% long, 40% short. Only 60% of that $5 bln ($3 bln) ends up back in stocks, not making up for the sale of stocks from the mutual fund. The remaining $2 bln becomes short sales, further depressing stock prices. Net selling of equities is $4 bln....
...At some point, too many hedge funds will create a situation where their ability to outperform the market is diminished. Too many people are standing in that circle shooting at each other. As returns more closely mirror the market, that 20% fee no longer looks so good in comparison to the single-digit fees charged by mutual funds. Perhaps then, pension managers will shift.
So what happens when the pensions decide hedge funds aren’t worth it any longer?
The pension takes $5 bln out of the hedge fund. This causes $3 bln in sales of equities and $2 bln in buying (closing the shorts). Then the money goes to the mutual fund, which puts all $5 bln into buying equities. When the pension shifts to mutual funds from hedge funds, the net is $4 bln in buying....
...It’s the hedgies’ ace in the hole, so to speak – their ability to short.
It will take a sustained downturn for pension managers to learn whether the marketing done by hedge funds (“We’re actually safer because we can hedge downturns!”) is matched by their performance. If it doesn’t, you’ll see pension managers leaving them in droves.
The other thing that could cause pension managers to leave hedge funds is a few more significant hedge fund blowups.... |
