Anatomy of a Market Crash: Blame it on Hedge Fund Liquidation

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(List compiled by Andrew Dominguez. Data sourced from Finviz and Fidelity)

Have you been wondering why stock markets around the world have plummeted over the past week or so? Yes, investors’ disappointment with the outcomes of debt deals in the US and the Eurozone probably has something to do with it. But David Goldman of Asia Times offers an additional explanation: hedge fund capital calls.

In Goldman’s mind, hedge funds must be behind the large sell-offs, not ordinary investors.

“On fundamentals, the stock plunge makes no sense. We’ve never had this kind of market bloodshed with a corporate earnings above 7% (and well above 8% on a forward-based bottom-up estimate), and the monetary authorities ready to provide unlimited liquidity to the market. Corporate earnings are solid–we aren’t talking about the phony financials’ earnings of 2006 or dot.coms with burn rates of 2000… The investors who care about retirement yields–individuals and pension funds–both are sidelined for different reasons. Hedge funds, who have had a dreadful year after accumulating enormous inflows, have no choice but to raise cash,” he writes

In other words, hedge funds are cash-strapped after sustaining huge losses in the markets. And their only source of cash for new (hopefully better) investments is their equity portfolio. Thus, the hedge fund sell-off is not an indication of the funds’ belief that US companies are performing poorly – in fact, under normal circumstances, hedge funds might have held onto these stocks. 

“Investors appear to [be] selling what they can, not necessarily what they want to. Why should electric utilities like Con Ed and Duke Power track the market down? These are the most boring bond-like equities in the universe.

CNBC right now is warning of reports that major head funds are taking massive losses, quoting the reports I cited earlier that the $1.25 trillion in equity hedge funds was massively bulled up in May. Now the hedge funds are all trying to exit through the same keyhole,” Goldman adds in a follow-up article.

Hedge fund portfolios are so massive that distressed fire sales can send share prices into a nosedive, especially when markets are panicky and fear a complete meltdown.

Does Goldman’s theory hold any water? Begin your research with this list of large cap stocks that have lost more than 10% over the last week and that have seen significant institutional selling over the current quarter.

Are these stocks being dragged down by excessive fund liquidation? Perhaps more importantly, does this create an opportunity for long-term investors to buy these stocks at a dramatic discount?

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List sorted by net shares sold by institutional investors as a percentage of the share float.

1. Yanzhou Coal Mining Co. Ltd. (YZC): Industrial Metals & Minerals industry with a market cap of $16.08B. During the current quarter, institutional investors have sold 165.2M shares (net), which represents 71.35% of the 231.54M share float. Share prices are down 11.65% on the week.

2. Tyco Electronics, Ltd. (TEL): Diversified Electronics industry with a market cap of $12.59B. During the current quarter, institutional investors have sold 130.7M shares (net), which represents 30.23% of the 432.40M share float. Share prices are down 11.6% on the week.

3. Valeant Pharmaceuticals International, Inc. (VRX): Drug Delivery industry with a market cap of $11.94B. During the current quarter, institutional investors have sold 24.2M shares (net), which represents 8.76% of the 276.33M share float. Share prices are down 23.2% on the week.

4. Weatherford International Ltd. (WFT): Oil & Gas Equipment & Services industry with a market cap of $12.63B. During the current quarter, institutional investors have sold 53.6M shares (net), which represents 7.22% of the 741.94M share float. Share prices are down 19.13% on the week.

5. Kohl's Corp. (KSS): Department Stores industry with a market cap of $13.09B. During the current quarter, institutional investors have sold 18.0M shares (net), which represents 6.84% of the 263.03M share float. Share prices are down 11.28% on the week.

6. LyondellBasell Industries NV (LYB): Specialty Chemicals industry with a market cap of $18.05B. During the current quarter, institutional investors have sold 16.8M shares (net), which represents 4.55% of the 369.10M share float. Share prices are down 14.84% on the week.

7. POSCO (PKX): Steel & Iron industry with a market cap of $29.93B. During the current quarter, institutional investors have sold 11.8M shares (net), which represents 4.33% of the 272.47M share float. Share prices are down 12.16% on the week.

8. Ameriprise Financial Inc. (AMP): Asset Management industry with a market cap of $10.79B. During the current quarter, institutional investors have sold 9.8M shares (net), which represents 4.15% of the 236.41M share float. Share prices are down 12.31% on the week.

9. Teck Resources Limited (TCK): Industrial Metals & Minerals industry with a market cap of $24.83B. During the current quarter, institutional investors have sold 17.6M shares (net), which represents 3.66% of the 481.21M share float. Share prices are down 10.17% on the week.

10. Nexen Inc. (NXY): Independent Oil & Gas industry with a market cap of $10.37B. During the current quarter, institutional investors have sold 18.5M shares (net), which represents 3.52% of the 525.50M share float. Share prices are down 13.46% on the week.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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