For weeks the traders have been telling you that hedge fund redemptions have been driving the market lower. But that could be changing.
According to a Reuters report, dozens of hedge funds are now telling investors they cannot get their money back right now in an attempt to limit a wave of redemptions and safeguard their own futures.
Limited Access To Money
Managers argue that, if they had to return investors' money exactly when investors demanded, funds would have to unload securities at fire-sale prices and many clients who were not looking to get out would be hurt by those moves.
Already, hedge funds have been blamed for accelerating the stock market's tumble by dumping shares to get liquidity. Spooked by hedge funds' worst-ever returns which average 20 percent this year, pension funds and wealthy individuals alike are leaving hedge funds faster than ever before.
"Restricting redemptions allows the managers to withhold selling into unfavorable markets," said Michael Tannenbaum, a partner at law firm Tannenbaum Helpern Syracuse and Hirschtritt LLP, explaining that panic selling in these markets can be "harmful to both sides: the investor and the redeemer."
After the Fact
But the restrictions might be coming a bit after the fact. On CNBC’s Closing Bell Tim Smalls, Head of US trading at Execution LLC tells Dylan Ratigan that he doesn’t expect forced selling to drag the market much lower. “I think we’ve seen the worst of it. People will wait for the worst to come in November and it might not.” In other words investors might anticipate a sell-off that never happens.
Smalls thinks this market is very similar to the one that followed the September 11th attacks in which we experienced a triple bottom. “Lows have been put into the market and we’re in a bottoming phase,” he says. However there might be one more low ahead and then a few month after that the market should make a meaningful move higher.”
In case you're wondering, according to Reuters, Knight Capital Group's Deephaven Capital Management halted redemptions at two of its hedge funds. Recently, hedge fund firm Basso Capital told investors it was postponing redemptions. Hedge fund firm Ore Hill Partners imposed a gate in late August. And before that Drake Capital Management and Pardus Capital Management began restricting clients' departures and Ellington Capital Management stopped allowing investors to exit one of its portfolios last year.
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CNBC.com with wires