Forced hedge fund selling may be over: TrimTabs

Date: Friday, October 17, 2008
Author: Alistair Barr, MarketWatch.com

Forced selling by hedge funds, which has exacerbated market turmoil in recent weeks and in particular crushed a group of stocks once favored by the funds, may be easing, according to a report Thursday by TrimTabs Investment Research.

Unfortunately, that may not mean the stock market has stopped falling, warned the firm, which tracks money flowing in and out of hedge funds, mutual funds and exchange-traded funds.

Hedge fund investors redeemed at least $43 billion in September as they reacted to the industry's worst year for performance in at least a decade, TrimTabs reported.

More redemptions are expected through the end of 2008, but TrimTabs said that many hedge funds have already sold enough of their positions to meet current and future withdrawals.

"They should not be the main source of forced selling anymore," TrimTabs Founder Charles Biderman said in an interview.

In the past month, concern about such selling has crushed some shares that have been hedge fund favorites, including Freeport-McMoran and CSX.

If hedge funds have already raised enough cash, that could reduce some of the pressure on these types of shares. However, the overall stock market may be already suffering from a new source of selling, TrimTabs added.

Mutual funds have been getting roughly $5 billion a day in redemptions in October because retail investors are spooked by the financial crisis, Biderman said.

Several times this month the stock market has slumped sharply during the final hour of trading. That may be because mutual fund managers are getting a summary of redemptions each afternoon and have to sell quickly to return investors' money by the next morning, Biderman explained.

"The problem with the market is not hedge funds anymore," he added. "Forced liquidations appear to be coming from mutual funds."

When forced selling by mutual funds stops, that may help the stock market stabilize. But such liquidations could last through the end of this year, partly because people may redeem losing mutual fund investments for tax purposes, Biderman explained