Cannibalism: The Latest Hedge Fund Strategy?

As a follow-up to my earlier post, many of the hedge funds that are being forced to liquidate positions due to redemptions and deleveraging are seeing an opportunity to take advantage of the mass selling (see Financial Times article).

Hedge funds will often be holding many of the same securities, either due to using similar strategies, or simply from chasing the same hot securities. As hedge funds begin unloading these positions, selling pressure will naturally cause lower prices and additional selling in a kind of longer-term reverse short squeeze as the number of redemption notices increases.

In an effort to profit from the selling, many of the same funds that are being forced to liquidate are now shorting other securities they don't currently own, but believe other funds are being forced to sell. This cannibalistic activity has been especially troublesome to some of the more popular and well-known funds, such as at Ospraie, whose positions are more well-known than small, less capitalized funds.

The larger funds are also natural targets given that it often takes a while for them to fully unwind their positions, providing better shorting opportunities. With the TARP bailout bill signed into law, and any benefits of the bill potentially priced into the market, we may be in store for more selling until the prey stop being preyed upon.

Comments

[Dame Daxx:]

Back in March when Bear Stearns collapsed, the story was how well the hedge funds were doing compared to the investment banks.

Now the IB's are gone. The Hedge Funds are crumbling. The strongest traders are falling just as the strongest stocks are falling.

2008 Oct 04 07:13 PM

[Bill Herbert:]

My view is that we are about to see an enormous meltdown in the hedge fund community. Redemptions are running high now, but after another 2,000 point drop over the next few weeks, there will be an all-out panic.

Over 70% of funds will be gone within the next year. The blowout, and losses, will be catastrophic.

One problem that really hasn't gotten full play yet is the fact that many funds have been using phony marks on their CDS positions, as well as other derivatives, for years. That's one of the big reasons for the explosion of credit derivatives - they are totally unregulated, and can be valued many different ways, using arcane, and frankly just fraudulent, models.

This will all come crashing down - look for major exposes in the Wall Street Journal and FT in about three months. Many rich hedge fund players will be astounded to find they are only getting back ten or fifteen cents on the dollar, if that. That's the real scandal that will play out in a few months.

2008 Oct 04 09:57 PM

[Dame Daxx:]

I agree copperbaron. Doesn't that mean the the Private Equity groups will be the next shoe to drop ,from this many shoed naughty centipede of financial over-indulgence? Who knows what they're marking to.

I'm short BX (via puts).

2008 Oct 04 10:41 PM

[iAccountant:]

My guess is that there are some hedge funds out there that are doing very well. When the smoke clears you will see that some people have made a lot of money on this meltdown. Zero sum game...

2008 Oct 05 01:21 AM

[User 265729:]

Cannibalism? I don't think that Americans will need to resort to that until, say, 2010. We should be out of food, water, cell phone minutes and SUV's by then...

Oh! This was about hedge funds... Sorry!

2008 Oct 05 01:22 AM

[venividivici:]

Look if this financial maelstrom destroys every hedge fund then at least something good will have come out of it. What we have now is a Sodom and Gomorrah market and that is why the abyss is beckoning. There needs to be a complete change of mentality. What we have now is a demented casino inhabited by a group of deranged gamblers whose modus operandi is to do anything that makes money today regardless of the consequences. And this is the end result. Will the lesson be learned? Judging by the way the governments are responding, NOT A SNOWBALL'S CHANCE IN HELL!!!

2008 Oct 05 09:46 AM

[Urbane Gori...:]

If I buy puts against my Hedge fund's ticker, Am I hedged against their hedges, or am I cannibalising them???? My head hurts! jegan ;-)

And smartstops.com is a pretty good deal..... Too bad TDAMeritrade is offering it to its clients, but is incapable of setting up its own website to allow Strategydesk to work with it.... Course it's also too bad that TDAmeritrade's service dept is incapable of answering questions correctly either... So much for Sam Waterston's TV ads....

2008 Oct 05 08:08 PM

[kurt walter:]

What do they call a former hedge fund manager? Hey, waiter.

2008 Oct 06 08:36 PM

[Monsieur Ca...:]

You might be interested to know that there's an online film that just came out which dramatizes this very subject:

crisisinthecreditsyste...

2008 Oct 07 06:04 PM

[Richard Wilson:]

It is true. Obviously there are many reasons why securities are diving, including lack of general confidence within the financial sector and stock market in general, but some hedge funds are surely preying up on the securities they know their competitors are holding...and they should. They job is to produce returns for investors, not make friends with other nice hedge funds.

I think that many hedge funds are dealing with how to market their funds now that they are down 10-20% for the year - they must as many will be running in the red if they do not start generating more management fees.

- Richard
Richard Wilson
richard-wilson.blogspo...

2008 Nov 07 12:06 PM

[Richard Wilson:]

I don't believe that 70% of hedge funds will be gone, I think 70% will face assets losses and then 90% of them will see a surge of new business and assets in 2010 2011. The brightest and most able work for hedge funds, this will be even more true now that investment banks are being wiped out by the day.

There is a lot of talk about hedge funds going away or all failing, I think the industry is far too diverse and nimble for that to ever happy. Once both investors and managers stop sitting on cash everything will turn around again.

- Richard
Richard Wilson
richard-wilson.blogspo...

2008 Nov 19 10:30 PM