Hedge funds prey on rivals

By Henny Sender in New York

Published: October 2 2008 23:34 | Last updated: October 2 2008 23:34

Hedge funds are embracing trading strategies designed to profit from the unwinding of large positions by their competitors, market participants say.

The increasingly cannibalistic activity stems from the wave of redemptions hitting hedge funds.

Because so many firms hold similar positions, forced selling by one in response to redemptions can have ripple effects, forcing other funds to sell.

More nimble hedge funds have sought to profit from the dynamic by taking short positions in securities known to be widely held by rivals. Goldman Sachs publishes a list of 50 “very important” hedge fund positions.

In its Wednesday update Goldman said: “Forced selling to cover redemptions and deleveraging . . . has put downward pressure on selected stocks.”

A favourite strategy of hedge fund managers during the bull market – mimicking the positions of others – has been turned on its head, Goldman said. “Buying the most concentrated stocks . . . has been a poor strategy during the current bear market.”

The announcement last month that Ospraie Management was winding down its flagship fund encouraged predatory activity.

One Hong Kong-based manager sent a note urging friends to short emerging and mining shares favoured by Ospraie.

Some hedge fund managers say they have been monitoring the positions held by Ospraie, if only to be ready if other funds with the same positions are forced to liquidate their holdings.

“I certainly wouldn’t want to be long any of these companies,” said one. “I want to lock up six-month borrowing on these shares and short them.”

Ospraie’s founder, Dwight Anderson, told investors on September 4 that 60 per cent of its losses in July and August stemmed from equities, mainly in energy and mining.

Its largest position was in Xto Energy, which had dropped from $73.74 in June to just under $43 and was among the 20 most widely held stocks by hedge funds, according to Goldman, Mr Anderson said.

Firms are also monitoring Deutsche Bourse because of a big position in its shares held by Atticus, which has told investors in its main hedge fund it is down 25 per cent so far this year.

Greenlight Capital, the hedge fund run by David Einhorn, told investors in a letter on Wednesday it was down 17 per cent so far this year, in part because “investors have been unwinding trades that they otherwise believe make sense”.

Greenlight said it would “try to be opportunistic” in response.