Recent Money Flow Shift Affects Hedge Funds

Aug 15, 2008: 10:42 AM CST

There’s been a clear shift in money flow (as well as asset classes) that started in June which has cost some prominent hedge funds dearly who were behind the curve.  Those who remained long commodities or energy and short financials (because it was the easy thing to do) were crushed in recent weeks.  Let’s look at a quick article and see the recent money flow shift, and what it might mean for the time being.

First, let’s look at the shift away from the Long Commodities and Short Financials combination, and let’s now look at the Technology and Health Care sectors for current money flow.

This comparison begins in January and takes us to present.  What I’m demonstrating is the massive shift and reversal first away from energy (notice the almost 20% sell-off from June) and strong Financials (green) rebound.  Energy peaked first and Financials bottomed and rallied sharply.  That’s the first take-away from the chart.

Funds or traders/investors who continued to hold the ‘hedge’ trade were crushed because market dynamics changed.  Specifically, T. Boone Picken’s (a famous oil expert investor), commodity fund of his BP Capital lost 35% in July alone (overall, his funds lost 10%), a massive decline for a singular month.  According to a article:

“Pickens said a “steep decline” in natural gas and oil had an “adverse impact on our performance” in an investor letter.

The Washington Post called the downturn “embarrassing….”

“Pickens was not the lone casualty of the commodity backlash. The average hedge fund lost 4.35% on the HFN Hedge Fund Aggregate Average in July.”

The blog “Fund My Mutual Fund” has an excellent, brief commentary (including other news links) about this money flow shift, including the following quotes:

“I don’t think one of the best investors/corporate raiders of the past 30+ years suddenly got stupid; the rules have simply changed.”

“I think this showcases yet again how heavily the “long commodities/short financials” trade was weighted by the hordes of institutional money. When all these [investors] decided to jump ship at the same time, we all capsized.”

“The velocity of the moves nowadays are really the only difference – what used to takes months to unwind is now taking days or weeks at most. If you dare sit back and think about the situation over a couple of weeks, you are down 30%. Shoot first, ask questions later.”

This is a critical point, one of which is exacerbated by algorithm/computer trading and instant news access.  Linda Raschke often uses the phrase “Dog-pile in, dog-pile out” to refer to this phenomena of rapid movement and capital shifts in such a short period of time, driven by the expansion of hedge funds.

It’s phenomenal to watch and participate, but the rules have changed from years ago.  Opportunities still abound, but we have to be much quicker and alert, and pay attention to many markets and capital shifts to understand potential opportunities.

We’ll continue to watch these developments and the implications for the broader markets.

1 Comment

One Response to “Recent Money Flow Shift Affects Hedge Funds”

  1. jeflin Says:

    Nice article, just to let you know, I included it in my investment carnival.