Hedge Fund Forced Selling Equals Potential Opportunities ~ market folly

Thursday, October 23, 2008

Hedge Fund Forced Selling Equals Potential Opportunities

Through this mess, numerous opportunities will arise. As the saying goes, "buy when there is blood in the streets." Well, the streets are flooded and Warren Buffett has already begun buying, getting ridiculously good deals for himself that retail investors could only dream of. But, the point of all this is that there are indeed opportunities. The main caveat with these opportunities is time frame. More likely than not, investors will need a very long-term investment outlook in order to see stocks appreciate given the volatile market we are in and will continue to be in.

Veteran hedge fund manager Jeff Matthews of Ram Partners had recently said that numerous hedge funds had overly concentrated portfolios which ultimately led to their problems. Also, he notes that numerous shops were mainly long, or mainly short, instead of being truly hedged as a hedge fund is supposed to be by definition. You can see Jeff's commentary on a recent Tech Ticker video here.

It's easy to see where numerous hedge funds had stacked their bets. Energy and natural resources plays have just been absolutely hammered week after week. Some of these equities are already priced for global recession and the apocalypse. Yes, a slow down is imminent. But, a global recession, I'm not so sure. In any event, the caveat once again comes down to time frame. We have no idea of knowing how long it will take the market to deleverage, how long it will take the hedge funds to liquidiate, and how many more investor redemptions there might be.

But, we do know that names hedge funds typically favored have since been put on fire-sale due to forced selling. Some of these names include Potash (POT), Cleveland Cliffs (CLF), Freeport McMoran (FCX), and many other energy names. Hedge funds also favored tech giants Apple (AAPL) and Google (GOOG). Many hedge funds we track here on Market Folly have held large positions in those very names. You can view Boone Pickens' BP Capital portfolio here, Atticus Capital's portfolio here, Harbinger Capital's portfolio here, Lone Pine Capital's portfolio here, & many more hedge funds at Market Folly by simply searching the blog.

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