Hedge fund redemptions and the markets

There’s a lot of pinging around this week in the stock market on what is relatively low volume. During low-volume sessions, large individual transactions can really make a huge difference in stock prices, potentially screwing up technical analysis of price movements, particularly when so-called exogenous events – that is, events outside of a company’s normal news cycle – play a role in the buying or selling.

This week might be a case in point. As Reuters reported this morning, “Saturday is the last day for thousands of investors to notify hundreds of hedge funds if they want their money back by year’s end.” The article then cited Eurekahedge, a hedge fund data tracker, in calculating that about $100 billion had already been pulled from hedge funds during the month of October.

What this means for the stock market is a lot of downward pressure on stock prices as hedge-fund managers hastily close out positions in order to meet the redemption requests of its clients. It’s the hedge fund world’s version of a bank run.

This effect is amplified in a low-volume trading session. In the month of November, only one session (yesterday’s rally) significantly topped the market’s average trading volume of stocks listed among the Dow Jones Industrial Average index.

Until the hedge-fund redemption issue sorts itself out, expect continued high volatility across the board, even when there is little company news affecting prices. By the turn of the year, I expect some measure of stability to return, but that won’t necessarily mean a bear-market rally, particularly if the general economic picture remains gloomy.