The Cost of Unwinding
Bespoken has quite the interesting graph of S&P stocks widely held by hedge funds and those that are not.
The hedge fund stocks that have been unwinding are way down compared to the rest. Right now from the low in January the hedge funds that had been unwinding have been outperforming the S&P. It might seem like a good idea to invest where the hedge funds have unwound, however, a heck of a lot of other hedge funds are at exceptionally high risk to unwind. If your favourite stock is the apple darling of Moron-Hedge-Funds-R-Us and it comes unwinding, well there goes 20-40% in a day.
Mish had a post about hedge funds and I couldn't agree more with the hedge fund lotto math. I doubt very much the average investor has time to study the hedge funds and figure out what risks they create. I certainly don't.
All you need is increasing numbers of people deciding they don't want their money in hedge funds anymore and these things implode. They have to sell to honour the redemptions and their action helps to push the price down and then they have to sell more because of a margin call and bingo, a fire sale that loses most of the hedge fund investor's money, and then also hits the mom and pop investors as their favourite stock goes cliff diving.
There's something like 5000 hedge funds out there and stuff I was reading last summer suggested about 500 of them were in trouble. I am curious about the outlook today.
It seems to me that the uncertainty out there goes beyond all measures of reasonable risk and even extreme risk.