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Hedge Fund 'Stress' Making Mess of Bottom-Picking Efforts

Posted Nov 07, 2008 10:32am EST by Aaron Task in Investing, Newsmakers
Related: ^dji, ^gspc, ^ixic, SPY, DIA, QQQQ, XLF

After two days of severe declines, stock stabilized globally Friday and at least in the early going in the U.S. But the past 48 hours have brought stark reminders of the dark days of September and October, including fears of forced selling by hedge funds.

Redemptions, rumors and losses continue to dog some of the biggest hedge funds, The Wall Street Journal reports, including:

  • Ken Griffin's $16B Citadel, whose main fund is down nearly 40% this year. The firm denies rumors it is receiving collateral calls from its lenders, who confirmed that denial, the WSJ reports.
  • Redemptions ranging from 6% to 33% of total assets have hit big funds, including Icahn Partners (which manages $7 billion), Highbridge Capital ($17B), Och-Ziff Capital ($28B), Plainfield Asset Management ($5B), Trafalgar Asset Management ($3B) and Blue Mountain Capital ($5B).

No tears are being shed for these hedge funds but redemptions -- i.e., investors asking for the money back -- means hedge funds have to sell assets, which can hurt performance further, leading to more redemptions, and so on.

This downward spiral in the hedge fund community, which had $1.5 trillion under management in early 2007, is one big reason for the continued downward pressure on the market.

The size and scope of hedge fund loses and redemptions - and the potential for more to come -- is a major wrinkle in the "market is cheap" mantra being repeated so often lately, including by some legendary investors.

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