Hedge Fund Selling: Still Pressuring Markets

Selling by hedge funds is still putting pressure on the market (see WSJ article). As we have discussed over the last month (see posts here and here), many redemption requests by hedge fund investors are now meeting their waiting periods, causing many funds to sell assets in order to raise cash. As quoted by Gregory Horn, president of Persimmon Capital Management:

In mid-October, redemption levels were in the 5% range but all of a sudden now it's cranking up to as high as 25% for some funds.

Certainly not good news for hedge funds, but maybe even worse news for the market. With continued forced selling, it is unlikely the market will quit trying to find a bottom. Hedge funds will continue to sell every rally, increasing volatility.

As long as the VIX continues to spike and stay at elevated levels, and we continue to see the "punch-in-the-stomach" late day sell-offs after nice rallies (both of which I suspect are indications of further hedge funds selling), we will continue to be in a volatile holding pattern between 850 and 1,000 on the S&P. Unfortunately, it is difficult to know exactly when the selling will quit, as the selling and redemption requests are tied together in what is becoming a volatile catch-22 pattern that is feeding upon itself.

The other day I heard an analyst say it was "too late to sell, but too soon to buy." Until hedge fund investors believe the former, it is unlikely any investors will quit believing the latter.

Comments

[investor88:]

sp to range from 850 to 1000. What if it breaks this band, to the upside above 1000 or break the floor of 850? Anybody's guess but my guess is eventually below sp 850.

2008 Nov 09 09:05 AM

[Pipo:]

Jim Rogers says we are in a liquidation phase only seen once in many years. Hedge funds are responsible for this widespread sell off.

jimrogers-investments..../

2008 Nov 09 11:57 AM