Who will end this bear market?
Posted
Oct 21 2008, 05:05 AM
by
Anthony Mirhaydari
Rating:
The turmoil in the stock market has scared many mutual fund investors into cash. But -- unlike during the last downturn -- don't expect a quick rebound as a result.
During the first two weeks of October, equity mutual funds redeemed $60 billion while bond funds lost roughly $30 billion, according to research from TrimTabs. That's the largest such outflow since records began in 1984.
Normally, it's the sophisticated, institutional investors that swoop in to buy at times like these, while retail investors return late to the party. During the 2001-2003 bear market hedge funds happily purchased the shares dumped by frightened households and ended the period with a gain of around 7.6%. Success attracted new capital and allowed the funds to buy more shares. This buying power helped established the market bottom in the autumn of 2002 and eventually brought back the retail investors.
Not this time. Tthe same funds are down nearly 20% over the past five months as ham-handed regulatory and political responses to the economic crisis have eliminated profitable trades. The short financials/long energy trade is the most notable, as are currency carry trades that included the Icelandic krona and the Japanese yen.
Such losses are especially painful since many of the investment strategies embraced in the industry are designed to perform regardless of what the broad market is doing. Given the poor results, investors are estimated to have withdrawn some $43 billion during the month of September, the largest outflow TrimTabs has seen.
These redemptions come at a critical time: Just ahead of the end-of-year period where redemption windows open at many funds -- setting the stage for much larger withdrawals over the coming months. JPMorgan estimates that total hedge fund outflows could top $150 billion over the next year, which through the magic of leverage, could force asset liquidations of around $400 billion. Shares of hedge fund favorites like Google, Apple, General Electric, Exxon Mobil, and Wal-Mart will suffer.
How bad could it get? The Financial Times is reporting that the chief executive of a top alternative investment manager believes the hedge fund industry could be cut in half over the coming months as the brutal combination of forced asset sales and investment losses spins the industry into a vicious cycle. To make matters worse, many expect drastically increased regulatory oversight of the hedge fund industry under either a McCain or Obama administration.
My guess is that the market's savior comes from across the seas: Sovereign wealth funds and other international pools of liquidity will eventually be the buyers that slay this bear market. At this point, the frightful truth is that the health of our economy depends on bureaucrats in places like China, the United Arab Emirates, and Singapore.
Disclosure: I don’t own or control shares in any of the companies mentioned. I can be contacted at anthony.mirhaydari@live.com
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