Trader Talk

Hedge Fund Traders: What's On Their Minds


I attended a meeting of about twenty-five hedge fund traders last night. These informal gatherings are fairly common on the Street; they're often sponsored by sell-side trading houses. Usually, it's a discussion on long and short positions of the various traders. This time it started off with an open-ended discussion on "what happened, and what might happen" in the near future.

About one-third of the group felt we were either in a recession already or were entering one; another third thought it could go either way, and the final third thought it wasn't going to happen.

There was considerable discussion about the strange bifurcation in sector performance. For example, retailers and financials have been trading like we are in a recession; however, industrials, materials, energy and tech have held up far better. The traders noted that this was largely because those sectors were, first, not as dependent on easy money, and second, were much more a part of the global economy, which continues to hold up well.

The traders were particularly disturbed by the wild, indiscriminate selling which characterized the first half of August. Many at the meeting got hurt badly by trading that they felt was largely irrational. All agreed this occurred largely because quant funds were forced to sell whatever they could to meet margin calls.

As for the liquidity crunch, opinions were divided as to whether the Fed cutting would make the difference, though most felt that cuts would help the sagging economy in the long term. The main problem was simply confidence; the credit markets are based on the belief that you will get your money back, and if that belief is thrown into doubt the system will simply cease to function.

September would be a particular tricky month, given the large rollover of asset-backed commercial paper. Many felt that much of this paper (as we have already seen) would not roll over and banks will once again become lenders of last resort; the trick, everyone agreed, is more time to work out a smooth transition, even if this involves considerable deleveraging. The more time that passes without a significant meltdown, the more likely that the transition could be accomplished with as little pain as possible.

One thing that would help, everyone agreed, was more transparency; letting everyone know what everyone had. Unfortunately, almost no one thought this was going to happen. It was noted that one fund who revealed even tiny losses had immediate redemption requests amounting to 20% of the fund. Nor was there much hope from the brokers, who are reporting earnings beginning next week. One trader called the major brokerage firms "kings of opacity."

Despite the concerns, most seemed to feel that the market would be higher at the end of the year than it is now.


1) GM Exec Rick Wagoner is blaming vehicle sales weakness in the U.S. on the housing market downturn, though he insisted that the fundamentals "look pretty good."

2) McDonald's continues to amaze. It's monthly same store sales have been nothing short of outstanding for months on end. This time August comparable store sales up 8.1% globally, 7.4% in the U.S. "Menu variety" (read salads and strong breakfast choices) was cited as the main factor by the company.

3) Metal rally continues. Gold at another high, copper up 2.4%, silver, palladium & platinum all up.

4) Western Digital joining Seagate in guiding Seagate, they cited higher prices and higher demand. Disk drive makers have had little pricing power for years. Western Digital up 4% pre-open.

Questions?  Comments?