The MasterBlog: Forced hedge fund selling knocks some stocks off kilter - MarketWatch
Subscribe to The MasterBlog in a Reader Subscribe to The MasterBlog by Email

MasterBlogs Headlines

Friday, October 17, 2008

Forced hedge fund selling knocks some stocks off kilter - MarketWatch

Forced hedge fund selling knocks some stocks off kilter - MarketWatch:

Forced hedge fund selling crushes some stocks

Hedge favorites Anheuser-Busch, Freeport-McMoran, CSX knocked off kilter

By Alistair Barr, MarketWatch
Last update: 10:35 p.m. EDT Oct. 16, 2008
SAN FRANCISCO (MarketWatch) -- Steel Dynamics Inc. has lost more than half its market value in the past month, despite quarterly results that showed the company in ruddy health.
Late Wednesday, the Fort Wayne, Ind.-based steel company (STLD
Steel Dynamics Inc
Sponsored by:
reported a 92% surge in third-quarter net income and revenue that more than doubled. The results fell short of analyst expectations, but that wasn't enough to explain the recent collapse in the company's shares, according to Chief Executive Keith Busse.
"It is simply beyond comprehension why our share price, which is supposed to reflect rational thinking by rational people, is where it is today," Busse said. "Those who have literally dumped their shares into a grossly oversold market have made some very poor investment decisions."
"A lot of that has to do with the hedge funds," he added during a conference call with analysts on Thursday. "They've driven this thing to almost a silly level where I think yesterday we were below our actual book value."
Steel Dynamics may be one of many companies that have seen their share price slump in the past month as the $2 trillion hedge fund industry suffers its worst losses in at least a decade. There are now early signs that such pressure may be easing. See related story.
Steel makers and other commodities companies have been popular holdings for many hedge funds as they bet on a boom in demand from fast-developing countries like China and India.
But hedge fund investors have been asking for their money back in recent weeks. That's forced some managers to unwind positions to raise cash for redemptions at the end of this year. See story on redemptions.
Investors redeemed about $43 billion from hedge funds in September and more withdrawals are expected through the rest of 2008, TrimTabs Investment Research, which tracks flows of investor money, said on Thursday.
A Goldman Sachs index of 50 stocks that are most heavily owned by hedge funds slumped 19% in September, while the Standard & Poor's 500 index dropped 9%. Another Goldman index, which monitors stocks that don't have many hedge fund investors, fell just 2% last month.
"Forced selling to cover redemptions and delevering by hedge funds has put downward pressure on selected stocks," David Kostin and his colleagues at Goldman wrote in a note to clients earlier this month.
"We expect hedge fund selling/deleveraging to continue," they added, while telling investors to bet against stocks heavily held by hedge funds and to buy stocks with the fewest hedge funds as shareholders.
Energy company Calpine Corp. (CPN
Sponsored by:
, coal company Alpha Natural Resources (ANR
Sponsored by:
and chipmaker Cypress Semiconductor (CY
Cypress Semiconductor Corporation
Sponsored by:
are among companies with the most hedge funds as investors, Goldman noted in its report.
Other well-known companies with lots of hedge fund investors include Google Inc. (GOOG
google inc cl a
Sponsored by:
, MasterCard (MA
mastercard inc cl a
Sponsored by:
and Anheuser-Busch (BUD
Anheuser-Busch Companies, Inc
Sponsored by:
Nearing an end?
However, there may be early signs that Goldman's suggested trade may be nearing an end. TrimTabs noted on Thursday that many hedge funds may have already raised enough cash to meet expected redemptions.
"They may not be the main source of forced selling anymore," Charles Biderman, founder of TrimTabs, said in an interview.
Indeed, shares of Steel Dynamics surged 23% to $8.99 on Thursday.
At the end of June, the third-largest shareholder of Steel Dynamics was TPG-Axon Capital, a big hedge fund run by former star Goldman Sachs (GS
Goldman Sachs Group, Inc
Sponsored by:
trader Dinakar Singh, according to FactSet Research.
It's not clear whether TPG-Axon still holds shares of the steelmaker, but the hedge fund was down 18% this year through the middle of September, according to Bloomberg News. That's left Singh on course for his first annual loss since he launched the firm in 2005.
Other big investors in Steel Dynamics at the end of June included Jeff Vinik, who left mutual fund giant Fidelity to start his own hedge fund several years ago.
D.E. Shaw, one of the world's largest hedge fund firms, Tudor Investment Corp., headed by Paul Tudor Jones, and AQR Capital Management were also among Steel Dynamic's top 20 investors on June 30, according to FactSet.
'Speculation bust'
Other commodities companies have suffered recently from having hedge funds as large investors.
Shares of Mosaic Co. (MOS
mosaic co com
Sponsored by:
, a leading fertilizer maker, has slumped 62% in the past month. The company counted D.E. Shaw, Renaissance Technologies and Citadel Investment Group, three of the largest hedge fund firms, among its top 20 investors at the end of June, according to FactSet.
Citadel told investors this week that it lost 26% to 30% this year, through Oct. 10. See full story.
Mosaic is also a favorite stock of Passport Capital, a $4.3 billion hedge fund firm run by John Burbank.
Passport generated big returns last year betting against subprime mortgages. The fund has also been investing in energy and basic materials companies in a bet on global economic growth and rising demand from countries like India.
Other hedge funds took similar positions based on this fundamental idea, betting against financials in the U.S. and against the U.S. dollar while going long energy and other commodities.
But as oil prices soared, Burbank said in a recent speech that there was "massive intervention" by central banks to get crude back down and to boost the U.S. dollar.
"They helped create a huge speculation bust" as hedge funds have had to unwind bets against financial companies and long positions in commodities, he explained. See full story.
Shares of Freeport-McMoran (FCX
Freeport-McMoRan Copper & Gold Inc
Sponsored by:
, one of the world's biggest copper producers, have slumped more than 50% in the past month. The company counts leading activist hedge funds Harbinger Capital and Atticus Capital among its top investors.
The Harbinger Capital Partners Offshore Fund I, run by Philip Falcone, lost almost 18% in September, leaving it down more than 5% during the first nine months of 2008, according to investors.
A European fund run by Atticus slumped 15.8% in September, according to investors.
Freeport-McMoran isn't the only company to be hit by trouble at large activist hedge funds.
Railroad giant CSX Corp. (CSX
CSX Corporation
Sponsored by:
lost a bitter proxy battle earlier this year with The Children's Investment Fund, or TCI, a top activist hedge fund run by Christopher Hohn.
TCI won several seats on CSX's board, but the hedge fund lost more than 15% in September, leaving it down more than 26% in the first nine months of 2008. Meanwhile, CSX shares have slumped 25% in the past month.
Merger arbs unwound
The shares of some companies involved in high-profile mergers and acquisitions have also been disrupted in recent weeks by trouble in the hedge fund industry.
Some hedge funds focus on merger arbitrage, a strategy in which managers bet on the outcome of deals by shorting the stock of the acquiring company and buying shares of the target company. As mergers move closer to completion, the spread between the two shares narrows, generating profit.
As some hedge funds have had to unwind these positions, merger arbitrage spreads have widened.
Anheuser-Busch shares have dropped almost 10% during the past month and now trade below $60. That's despite an agreement the beer maker has signed to be acquired by InBev for $70 a share.
Rohm & Haas shares (ROH
Rohm and Haas Company
Sponsored by:
have slipped 4% in the past month, leaving them trading at $70.26 on Thursday. Dow Chemical (DOW
The Dow Chemical Company
Sponsored by:
agreed to buy the chemicals company for $78 a share in July. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.

No comments:

Post a Comment

Commented on The MasterBlog

Tags, Categories

news United States Venezuela Finance Money Latin America Oil Current Affairs Middle East Commodities Capitalism Chavez International Relations Israel Gold Economics NT Democracy China Politics Credit Hedge Funds Banks Europe Metals Asia Palestinians Miscellaneous Stocks Dollar Mining ForEx Corruption obama Iran UK Terrorism Africa Demographics UN Government Living Bailout Military Russia Debt Tech Islam Switzerland Philosophy Judaica Science Housing PDVSA Revolution USA War petroleo Scams articles Fed Education France Canada Security Travel central_banks OPEC Castro Nuclear freedom Colombia EU Energy Mining Stocks Diplomacy bonds India drugs Anti-Semitism Arabs populism Saudi Arabia Brazil Environment Irak Syria elections Art Cuba Food Goldman Sachs Afghanistan Anti-Israel Hamas Lebanon Silver Trade copper Egypt Hizbollah Madoff Ponzi Warren Buffett press Aviation BP Euro FARC Gaza Honduras Japan Music SEC Smuggling Turkey humor socialism trading Che Guevara Freddie Mac Geneve IMF Spain currencies violence wikileaks Agriculture Bolívar ETF Restaurants Satire communism computers derivatives Al-Qaida Bubble FT Greece Libya NY PIIGS Republicans Sarkozy Space Sports BRIC CITGO DRC Flotilla Germany Globovision Google Health Inflation Law Mexico Muslim Brotherhood Nazis Pensions Peru Uranium cnbc crime cyberattack fannieMae pakistan stratfor Apollo 11 Autos BBC Bernanke CIA Chile Climate change Congo Democrats EIA Haiti Holocaust IFTTT ISIS Jordan Labor M+A New York OAS Philanthropy Shell South Africa Tufts UN Watch Ukraine bitly carbon earthquake facebook racism twitter Atom BHP Beijing Business CERN CVG CapitalMarkets Congress Curaçao ECB EPA ETA Ecuador Entebbe Florida Gulf oil spill Harvard Hezbollah Human Rights ICC Kenya L'Oréal Large Hadron Collider MasterBlog Morocco Mugabe Nobel Panama Paulson RIO SWF Shiites Stats Sunnis Sweden TARP Tunisia UNHRC Uganda VC Water Yen apple berksire hathaway blogs bush elderly hft iPad journalism mavi marmara nationalization psycology sex spy taxes yuan ALCASA ANC Airbus Amazon Ariel Sharon Australia Batista Bettencourt Big Bang Big Mac Bill Gates Bin Laden Blackstone Blogger Boeing COMEX Capriles Charlie Hebdo Clinton Cocoa DSK Desalination Durban EADS Ecopetrol Elkann Entrepreneur FIAT FTSE Fannie Freddie Funds GE Hayek Helicopters Higgs Boson Hitler Huntsman Ice Cream Intel Izarra KKR Keynes Khodorskovsky Krugman LBO LSE Lex Mac Malawi Maps MasterCharts MasterFeeds MasterLiving MasterMetals MasterTech Microsoft Miliband Monarchy Moon Mossad NYSE Namibia Nestle OWS OccupyWallStreet Oman PPP Pemex Perry Philippines Post Office Private Equity Property Putin QE Rio de Janeiro Rwanda Sephardim Shimon Peres Stuxnet TMX Tennis UAV UNESCO VALE Volcker WTC WWII Wimbledon World Bank World Cup ZIRP Zapatero airlines babies citibank culture ethics foreclosures happiness history iPhone infrastructure internet jobs kissinger lahde laptops lawyers leadership lithium markets miami microfinance pharmaceuticals real estate religion startup stock exchanges strippers subprime taliban temasek ubs universities weddimg zerohedge

Subscribe via email

Enter your email address:

Delivered by FeedBurner