Apart from the daily macro-economic news, there is a macro-drama going on in the hedge fund world that is strongly influencing the market at this time. We have heard many rumors of forced selling by hedge funds over the last few months as a partial explanation for the 3-5 fold increase in daily volatility. Formal announcements of losses and fund closures are now starting to appear.
One spectacular example is Tontine Partners, a $10 billion dollar hedge fund that opened its doors in 1997. In the past, the activist fund posted remarkable returns, boosting net income more than 100% in both 2003 and 2005. How did it do that? Like many hedge funds, the managers focused on a macro investment theme, buy very large positions in related companies and then pressure management to improve shareholder value. The Tontine funds were heavily invested in homebuilders in 2003 and steel companies in 2005. For a period of time Tontine owned about 10% of Beazer BZH and pressured the company to initiate a share repurchase program to deploy its excess cash.
The fund owned Beazer and most of the major homebuilders this summer, along with the brokerages, steel companies and a ton of financials, including regional banks. US Steel was its top holding in Q2 and AKS was #5 according to its 13F SEC filing. Two of the company's funds have now lost over 2/3 of their value and will be closed.
Some of the larger hedge funds actually give conference calls and are followed by Wall Street Analysts. 12-year old GLG Partners, one of Europe’s largest hedge funds, with 40 sub-funds that focus on equities, emerging markets and bonds, now manages just $17 billion for high net worth individuals and institutions after experiencing a third quarter loss of 27% of its capital.
Platinum Grove Asset Management LP, a hedge fund firm co- founded by Nobel laureate Myron Scholes (the Scholes of the Black- Scholes options formula), halted investor withdrawals from its largest fund after it lost 29% of its assets in the first half of October alone. The precipitous drop left Platinum Grove with a 38% annual loss through mid-October.
Many funds managers are writing letters expressing disappointment, embarrassment and shock to their clients. Overall, however, hedge funds are doing better than the global indices, down 14-16%, compared to index losses about twice that much.
Nevertheless, we concur with the manager of Hayman Advisors who wrote last month, “Be careful buying ANYTHING today. There will be a time to buy stocks. That time is a few years into the future when the strong have separated themselves from the week … a time when unemployment has hit 10% and U.S. GDP has dropped 4-5% (maybe more).”
As individual investors and traders we actually rely on hedge funds to blaze a path through the investment forest. It is not too difficult to tell when the funds start to pile in to a sector, industry or theme. We can then walk comfortably behind them and benefit from their aggressive accumulation strategies, massive capital base and powerful conviction. We expect them to pile back into various Emerging Market investments in 2009-2010 as the global recession abates.
When these folks get in trouble, however, they die a horrible and violent death that creates a massive amount of chaos and confusion in the market. Funds are dying right now. October was a terrible month for them and the monthly performance statements have been sent to investors.
We expect a negative end-of-year market as a result of this situation.
Excerpt from The Spear Report Professional Edition www.spearreport.com
One spectacular example is Tontine Partners, a $10 billion dollar hedge fund that opened its doors in 1997. In the past, the activist fund posted remarkable returns, boosting net income more than 100% in both 2003 and 2005. How did it do that? Like many hedge funds, the managers focused on a macro investment theme, buy very large positions in related companies and then pressure management to improve shareholder value. The Tontine funds were heavily invested in homebuilders in 2003 and steel companies in 2005. For a period of time Tontine owned about 10% of Beazer BZH and pressured the company to initiate a share repurchase program to deploy its excess cash.
The fund owned Beazer and most of the major homebuilders this summer, along with the brokerages, steel companies and a ton of financials, including regional banks. US Steel was its top holding in Q2 and AKS was #5 according to its 13F SEC filing. Two of the company's funds have now lost over 2/3 of their value and will be closed.
Some of the larger hedge funds actually give conference calls and are followed by Wall Street Analysts. 12-year old GLG Partners, one of Europe’s largest hedge funds, with 40 sub-funds that focus on equities, emerging markets and bonds, now manages just $17 billion for high net worth individuals and institutions after experiencing a third quarter loss of 27% of its capital.
Platinum Grove Asset Management LP, a hedge fund firm co- founded by Nobel laureate Myron Scholes (the Scholes of the Black- Scholes options formula), halted investor withdrawals from its largest fund after it lost 29% of its assets in the first half of October alone. The precipitous drop left Platinum Grove with a 38% annual loss through mid-October.
Many funds managers are writing letters expressing disappointment, embarrassment and shock to their clients. Overall, however, hedge funds are doing better than the global indices, down 14-16%, compared to index losses about twice that much.
Nevertheless, we concur with the manager of Hayman Advisors who wrote last month, “Be careful buying ANYTHING today. There will be a time to buy stocks. That time is a few years into the future when the strong have separated themselves from the week … a time when unemployment has hit 10% and U.S. GDP has dropped 4-5% (maybe more).”
As individual investors and traders we actually rely on hedge funds to blaze a path through the investment forest. It is not too difficult to tell when the funds start to pile in to a sector, industry or theme. We can then walk comfortably behind them and benefit from their aggressive accumulation strategies, massive capital base and powerful conviction. We expect them to pile back into various Emerging Market investments in 2009-2010 as the global recession abates.
When these folks get in trouble, however, they die a horrible and violent death that creates a massive amount of chaos and confusion in the market. Funds are dying right now. October was a terrible month for them and the monthly performance statements have been sent to investors.
We expect a negative end-of-year market as a result of this situation.
Excerpt from The Spear Report Professional Edition www.spearreport.com