Hedge Fund Hell

A miserable quarter for hedge funds was capped off with a miserable week. The quarter saw the reversal of several popular hedge fund trades and the worst monthly performance since 2002. In the past week, the market did not move much with the S&P down 0.72%.

However, much of the damage for hedge funds was below the surface. According to Goldman Sachs, hedge funds are overweight the technology sector and net short the financial sector. Last week, the NASDAQ was down close to 2% and the financials rose over 3%, putting further pressure on hedge fund performance. The news of a Lehman (LEH) resolution might help perpetuate the short covering rally in the financials. There is now potential for further redemptions, which is a wild card. I will not try to predict what will happen but will look to take advantage of a disconnect if it does occur.

The economy continued to deteriorate with the 4 week moving average of unemployment claims at 440,250. The credit crunch worsened with credit spreads widening on the week. Growth around the world is slowing and the effects of the stimulus checks are wearing off. We still have not seen the type of fear we saw that marked the bottom of the 2000-2003 Bear Market and valuations are fair at best. I don’t believe this Bear Market is over. However, in the very short term I am somewhat constructive on the market.

The Bear Market rally off the July low is in its seventh week (the rally off the Bear Stearns bottom lasted over 8 weeks). While I believe the rally is nearing its end, I think it can continue for a while longer. At the end of a bear market rally sentiment is usually positive, with people declaring that the bottom is in.

Currently, more advisors in the Investor’s Intelligence survey are bearish than bullish. Anecdotally, I don’t see a lot of bulls other than the usual permabulls. Early this week has positive seasonality and the market is still not overbought. In addition, while Friday’s point decline was large, market breadth was not bad and new lows did not expand. In a bear market the danger is always to the downside and this rally is getting old, so I am cautious. That said, I think the market tries to rally early in the week.

I don’t usually have an opinion on currencies but the US dollar rally has been extreme. Everyone is now expecting a stronger dollar. When there is such an overwhelming consensus the crowd is usually wrong. This week’s Commitment of Traders report shows speculators with their second largest net long position in the US Dollar Index ever, while the smart money is heavily short the dollar. The last time speculators were so heavily long the dollar marked the beginning of a long hard fall for the US dollar.

Disclosure: Author holds a long position in FXE

Comments

[inthemoney:]

Don't see a lot of bulls? Then who drove the market up 2.5% just last Thursday on a fantasy GDP number?

2008 Sep 01 11:25 AM

[secmaven:]

Hedge fund manages collect their percentage management fee whether or not they make money. So they should care?

2008 Sep 01 12:00 PM

[notsosmart:]

unless you are really wealthy(&very greedy) why bother with hedge funds.those who lose can afford it & those that cant afford it should not have been in.secmaven is so right.the managers of these funds have it great.heads i win ,tails you lose,how can smart people fall for his?

2008 Sep 01 03:25 PM

[Prudent Man...:]

Where is the "Hedge" in Hedge Funds? These aren't hedge funds. Anyone who thinks they are should be buying T Bills. These are nothing but over-leveraged crap shooters and like all crap shooter keep playing until they lose everything.

I just happened on this article by accident, as I asked to be removed from the e-mail list, as I usually disregard anyone who claims to be ha hedge fund manager.

Many years ago, when I started as a professional, we actually did hedge our bets.

2008 Sep 01 05:49 PM

[kkin365:]

In the latest issue of Barron's, there is a story of hedge funds. It seems that a fund mgr is doing well when he/she is down 12%, since the market goes down even more. I like to lose money on my own.

2008 Sep 01 08:13 PM

[notsosmart:]

kkin365- you are right.

2008 Sep 01 08:25 PM

[whidbey:]

Very negative sentiment in the comments. I suspect we are on the edge of some sort of a splash up, just before a cascading plunge to dow 9755 give or take a few points. I too hate forecasting, but when you got, use it.

By the way, the dollar is strong only because the Euro is sinking, and so too most other currency units, but alas, that never lasts, so get gold.

2008 Sep 01 08:37 PM

[John C. Lee:]

R.I.P 9/2/2008 - Ospraie Fund. Sucks to be LEH right now

2008 Sep 02 08:03 PM

[John C. Lee:]

that is some seriously broken english

2008 Sep 03 07:40 AM

[John C. Lee:]

even more broken english lol!

2008 Sep 03 09:08 AM