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Rx For A Bipolar Market

Rx for a Biploar MarketThe more the uncertainty in the stock market, the higher the volatility. Personally, I believe this recent extreme volatility is derived from hedge fund activity.

Hedge funds control large amounts of money and don’t have the limiting rules of mutual funds. They can move quickly in and out of investments of their choice. But, hedge funds must provide returns much better than mutual fund returns in order to justify their costs (and jobs).

There’s extreme competition between the many hedge funds to capitalize on certain technical readings. This is just my speculative opinion, but now that the market has turned south, there’s high anxiety on their part NOT to show losses (oops.. I mean negative growth). The more the fundies compete to be the “first in” or “first out”, the higher the volatility.

So, as long as this happens, I’m expecting more volatility.

  

Comments 1

  1. Mike wrote:

    Just to put in perspective how hedge funds could cause such volatility, take a look at these numbers from a CASAM press release, found via Pensions & Investments website:

    CASAM, together with the non-profit academic research center CISDM, estimate total hedge fund assets at the end of 2007 at 2.16 trillion USD, with a total number of hedge funds of nearly 10,000. The Industry Report reveals that while the majority of funds remain domiciled outside the United States, predominantly in the Cayman Islands, the United States continues to be the principal place of business for an estimated 60% of management companies, with 25% of management companies operating in New York alone. In terms of assets, equity long/short is the single largest hedge fund strategy, with a total of $568 billion, followed by event driven multi-strategy with $245 billion, and global macro with $221 billion.

    In 2007 hedge funds returned 10.15% on an equal weighted basis, with those invested in emerging markets posting the highest results of 17.10% for the third consecutive year. The return for funds of funds overall in 2007 was 8.68%. Commodity trading advisers as a whole were up 11.57%, the highest annual performance since 2002. Among CTAs, equity CTA managers posted the highest returns of 23.58%, while physicals CTA managers posted the lowest performance with returns of negative 1.35%.

    Emphasis added by me concerning hedge fund strategy.

    Posted 25 Mar 2008 at 4:39 pm

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