Hedge Funds Eat Their Young

by: Paul Kedrosky October 03, 2008 | about stocks: SPY    
Paul Kedrosky

Paul Kedrosky

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The nice thing about the hedge fund industry? Left alone in a room chasing returns long enough, it will consume itself and we will have one less over-levered bunch of crazies to worry about in this mass de-levering economy.

Today's evidence comes from a piece in the FT highlighting the various cannibalistic and generally sociopathic things hedge funds are doing to take advantage of each other's problems.

  • Funds are mercilessly shorting the Goldman Sachs MVP list, an index of the most widely-held stocks among hedge funds. With hedgies selling  frantically to meet redemptions, it is a way to prey on one another.
  • They are watching for other funds winding down, and shorting the crap out of their holdings, hoping to thereby screw up other funds, thus causing more selling.
  • It is so bad among widely-held hedge fund stocks that David Einhorn of Greenlight Capital has had a 17% down year, the worst in his fund's history, despite nailing the Lehman short trade.

As I said, the solution is to leave 'em all alone in a locked room for a while. Problem solved.

Update

A few people have sent over variants of this after my earlier post about hedge funds' cannibalism practices.. Here is a graph of the Goldman Sachs VIP index of most widely-held hedge fund positions as it has performed against the S&P 500 over the last few years, and then in the last three months. Think of the cross-over point at the beginning of September as hedgies getting a taste for consuming one another.

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This article has 6 comments:

  •  
    Oct 03 01:26 PM
    An extremely elegant solution!
    Reply | Link to Comment
  •  
    Oct 03 03:56 PM
    Very much like my father's prescription for dealing with hardened criminals -- put them on an island and everyday drop off enough food for half of them
    Reply | Link to Comment
  •  
    Oct 03 04:01 PM
    Where can I see the said list? Is MA, NOV on it by any chance?
    Reply | Link to Comment
  •  
    Oct 03 06:12 PM
    I wonder, could this be why short selling funds do not want their positions reported to the public? They don't want long funds doing to them that which they do to long funds.
    Reply | Link to Comment
  •  
    Oct 03 10:18 PM
    www.inveztor.nl/viewim...
    Reply | Link to Comment
  •  
    Oct 04 02:55 PM
    I'm a strong supporter of free and open markets, even if the SEC, Fed and Treasury are not. Hence, I am a big proponent of LEGAL short selling, for the liquidity, price discovery and other benefits it provides to the markets.

    I'm also a big non-supporter of the egregious and despicable practice of naked short selling which has decimated so many investors, particularly small ones, and which is the exclusive domain of the hedge funds who operate in the shadows and share their profits with the brokers and trading desks who do their trades and provide their funding for them.

    I'm not sad to see the demise of so many hedge funds, even if it means more volatility and short term pain for all investors. Their meltdown is part of the process by which Darwinian capitalism cleanses the markets and ultimately restores confidence, and liquidity, to itself.

    So, as far as the hedge funds go, my thought is burn baby, burn.
    Reply | Link to Comment
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