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October could be worst for hedge funds since 2000, Everyone is long the same stuff

Date: Monday, October 31, 2005
Author: Opalesque.com

October could be worst for hedge funds since 2000, Everyone is long the same stuff: Top-performing hedge funds give back part of their profits, Seeking a few winning trades

October could be worst for hedge funds since 2000
Reuters reports tumbling stock prices and a high-profile bankruptcy in the United States mean October is likely to be the worst month for hedge funds since the 2000 equities crash, industry participants say. However, they do not expect any losses this month to trigger a mass investor exodus from hedge funds, the investment vehicles which some see as risky because they can use derivatives, short sell and borrow or leverage to take bigger positions.

Expectations are that average losses will be between 2 and 3 percent.

After a solid third quarter, October has been one of the toughest months
From Money.cnn.com: October is frequently a tough month but this year has been particularly brutal, due to this month's drop in energy stocks, corporate deals that fell through, and a tough market for stock and bond markets, according to people in the industry.

"Outside Japan, most of the major markets are down, the emerging markets got hurt a lot, and macro funds that decided to go long in October are going to get hurt very badly.

Everyone is long the same stuff: Top-performing hedge funds give back part of their profits
From the NY Times: …"Everyone is long the same stuff," said Robert L. Chapman Jr., a veteran fund manager who is returning from a sabbatical to raise a new hedge fund. "Investors piggyback off of competitors' research, but then get easily spooked when the stocks move against them."

Some of this year's top-performing hedge funds have given back portions of their profits in October. The flagship hedge fund of Atticus Capital, an $8 billion manager, is down 9 percent for the month as of last week, although the fund is still sitting on gains of 40 percent for the year, according to a person briefed on the results.

Third Point, a hedge fund firm managed by Daniel S. Loeb, a well-known activist investor, is facing a loss of around 9 percent this month for its largest fund, leaving it with a gain of more than 11 percent for the year so far, a person briefed on that fund's results said. The person declined to speak for attribution, citing regulatory restrictions on promoting hedge fund results. And York Capital, a $7 billion manager, was nursing a loss of more than 4 percent as of the middle of this month, while clinging to a nearly 3 percent gain for the year.

Seeking a few winning trades
From TheStreet.com: …One example has been a propensity among managers to buy energy shares while going short retail. That approach has been a loser as crude prices have declined. Another dangerous sector has been merger arbitrage. "People are getting killed. Too many deals get busted," complains an investor. Last week's example was School Specialty (SCHS), a Wisconsin-based provider of education services and tools. Last Tuesday, Bain Capital announced that it was canceling a plan to buy the company.