Hedge funds are betting on disaster

August 30, 2012 | Author: | Posted in Finance

Hedge funds are betting on a disaster hitting the financial markets inside the subsequent various quarters, with managers holding onto historic levels of money.

That so-called dry powder provides them the money they need to have to quickly jump in if markets sell off, according to several hedge fund managers and industry consultants.

“Most hedge funds I see are carrying decrease industry exposure than I’ve observed in some time,” said Brad Balter, founder of investment advisory firm Balter Capital Management. “This just isn’t to say they are net brief. They only need to conserve their obtaining energy and be ready for main opportunity sets that may well arise.”

A lot of are anticipating that Europe’s debt crisis, the U.S. fiscal cliff, or the slowdown in China will lead to a 2008-like reaction about the globe, when stocks swiftly sold off within the wake of the monetary crisis.

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But betting on a downturn within this atmosphere can be a risky play.

“I haven’t seen the degree of uncertainty this high to get a long extended time,” mentioned Komal Sri-Kumar, chief worldwide strategist at TCW . “If you had been a hedge fund and you didn’t know when the correction would come but were concerned, it would tends to make sense to maintain cash offered.”

Because of this defensive posture, hedge funds have missed out on the 2012 stock rally. The S&P 500 (SPX) has gained 11% through July 31, while Morningstar’s hedge fund index of nearly 1,000 funds gained just 3.7%.

The SEC only requires hedge funds to disclose stocks they own, and not how much money they’re holding or what stocks they’re betting against.

Holding onto cash is actually one in the boldest moves a hedge fund can make. Hedge fund managers get a 2% fee for all the money they manage, so investors rapidly grow irritated with managers who sit and wait. “It’s a natural reaction to say why am I paying you to hold money,” said Daniel Celeghin, partner at hedge fund consulting firm Casey, Quirk & Associates.

Some funds have outperformed the S&P. Among them: Tiger International Management, which focused on technology stocks and counts Apple (AAPL) as its top holding, is up far more than 20% as of July 31, according to a source with knowledge on the fund’s returns. And the flagship hedge fund at Citadel run by billionaire Ken Griffin is up 11.5% through July 31, in line with sources familiar with its returns.

Despite the industry’s overall recent poor performance, investors haven’t shied away. In the first quarter of 2012, the hedge fund sector held a record $2.13 trillion of assets, in accordance with Hedge Fund Research. During the second quarter, investors pulled back slightly, leaving them with $2.10 trillion.

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