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Hedge funds focusing on stocks hold about $1.2 trillion in assets and are looking at what may be their “worst year on record,” the Financial Times said, with the typical fund losing 8 percent this year through May, according to data service HFR.
The scale of loss dwarfs that in the first five months of all other crisis years in HFRs database, which extends back to 1990, the service said.
“It feels worse” for hedge funds “than in 2008,” Skybridge Capital founder Anthony Scaramucci told the FT.
The funds now risk a downward spiral: as performance suffers, customers may withdraw their money, forcing the funds to sell holdings on demand, even if it means taking a loss.
The scenario would heighten volatility and push markets lower, the FT noted.
Stock funds’ plight stands in dark contrast with hedgers trading currencies or interest rates, both of which have pocketed hefty profits this year.
Still, stock funds’ 8-percent loss is less than the S&P 500s nearly 22 percent dive from its high.
Hedge funds working the stock market saw prices rising through the COVID War and emphasized “long” bets that share prices would continue to rise.
Now that the markets have sunk into bear territory, those funds “are facing an existential crisis,” Andrew Beer, managing member at the Dynamic Beta investment firm.
“Stock selection has been poor,” he noted. “People have jumped off the tracks after the train already hit.”
“Even long-time investors are wondering why they’re paying managers high fees while bearing all the risk,” he added.
TREND FORECAST: From the top down, big investors to the small timers, despite the economic realities, their “advisors” have, and will keep telling their clients that markets go up and down and to “stay invested.” Why? Because once they “correct” equities will be flying high again and the losses the clients are now suffering will turn into high profits.
However, since those invested with hedge funds are much more knowledgeable about what in the world is really going on than the average Main Street investor, we forecast that more money at a quicker pace will be exiting hedge coffers while the John and Jane Doe’s will do what they are told and go down with the markets.