A wave of redemptions is hitting hedge funds, and the surviving funds are adopting predatory strategies to profit from the unraveling of the positions of their rivals.
According to a report published in the Financial Times, hedge funds are engaging in increasingly cannibalistic activity in order to survive.
Since so many firms hold similar positions, selling by one in response to redemptions can have ripple effects, forcing other funds to sell.
More nimble hedge funds have sought to profit from the dynamic by taking short positions in securities known to be widely held by rivals.
The strategy of hedge fund managers during the bull market — mirroring the positions of others — has been reversed, Goldman Sachs analysts said in a research note. "Buying the most concentrated stocks … has been a poor strategy during the current bear market," the analysts reported.
The recent news that Ospraie Management was shutting down its flagship fund encouraged predatory activity.
Hedge fund managers have been monitoring the positions held by Ospraie, readying themselves if other funds with the same positions are forced to liquidate their holdings.
The fund's largest position was in XTO Energy, which dropped from $73.74 in June to $24.81 during trading today. That company was among the 20 widely held stocks by hedge funds, according to Goldman's research note.
Funds are also watching Deutsche Bourse, due to its big position in shares held by Atticus, which told investors that its main hedge fund is down 25 percent so far this year.
In a note to financial journalists, Houman Shadab, a senior fellow at the Mercatus Center at George Mason University, said that, like other investors, hedge funds are looking for strategic buying opportunities in this turbulent climate.
"By standing willing to purchase the assets that other companies must unload, hedge funds make the unwinding process much smoother and prevent losses in their sector from spreading," Shadab says.
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