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Hedge Funds Blamed For Market Whipsaws

Date: Monday, August 6, 2007
Author: Hedge Fund Daily

The market’s whipsawing – closing up 150 points one day, down 200 or so the next – in the waning minutes of trading is the work of hedge funds, Associated Press reports. Actually, AP used stronger language, saying the recent wild rides demonstrate “the increasing influence hedge funds have in manipulating the market.” AP notes that hedge funds account for nearly half the daily volume on the New York Stock Exchange, and they’re moving quick and dirty on the heels of some recent news that has battered them. “This is how hedge funds and big proprietary trading desks on Wall Street make their money,” Peter Cohen, president of consultant and venture capital firm Peter S. Cohen & Associates, told AP. “For the individual investors, they are completely out of the loop and along for the ride.” The collapse of two Bear Stearns hedge funds and rumors about Caxton Associates facing margin calls (which the firm discounted in a letter to investors) and other such events “create an environment for people to generate profits on a short-term basis, working off fear and greed,” David Grenier, president of Cutler Capital Management, said in an AP interview. “This kind of market allows some hedge funds to test their strategies with index funds, and the guys sitting with exotic strategies are more willing to wheel and deal in this kind of volatility.” While hedge funds try to cash in on this volatility, other investment types, namely portfolio manages and floor traders, are taking it on the chin. Peter Dunay of Leeb Capital Management told AP, “I don’t know how long this can go on before some of these traders hit the breaking point.”