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The Cost of Unwinding

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March 06, 2008 – Comments (5)

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. 

5 Comments – Post Your Own

#1) On March 06, 2008 at 10:13 AM, chk999 (99.97) wrote:

The bespoke link doesn't have the list of stocks on it, that might be a premium feature. This is smelling like a rare bargain hunting opportunity.

Chris - sniffing around for bargains 

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#2) On March 06, 2008 at 10:30 AM, dwot (43.80) wrote:

Chris, I'd agree, but at this point I think the bargin hunting is on the early side.  It is exactly where I'll be looking, but I think it is early.  This is an excellent place to be looking for trading.

On another point, http://crookery.blogspot.com/2008/03/bad-guys-before-congress-round-one.html.

 Now is the time for Americans to be writing lynch mob letters to the editors about these guys.  It doesn't hurt to write political leaders about it as well. 

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#3) On March 06, 2008 at 1:17 PM, abitare (43.81) wrote:

dwot,

Good post. I will repost Warren Buffett quote on hedge funds:

"I'll tell you what I think of hedge funds. Hedge funds are a huge fad. You can pick any ten hedge funds and I'll bet that on average they will underperform the S&P over the next ten years. You can't create more money out of American business than the business itself creates; so most of these hedge funds will not be able to justify their outlandish fees over the long-term and they will disappear. On Wall Street, there are innovators, imitators, and total incompetents. I'm afraid that the majority of hedge funds around the globe now are run by the latter two categories of people."

 

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#4) On March 06, 2008 at 1:23 PM, dude59 (24.54) wrote:

Buffet also said that you should buy when everyone else has agreed that the situation is horrible, (Buy on fear), and sell when everyone agrees that the situation is great, (sell into greed).

I think that we have not yet reached the point where everyone agrees that the situation is horrible. That point will be the bottom, and there will be many opportunities then. Keep your powder dry. 

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#5) On March 06, 2008 at 4:31 PM, abitare (43.81) wrote:

dwot,

We both had +400 point days, but we have a lot of different stocks. I would like to copy some of your picks but I do not have any more rooms for picks.  

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