Transcripts

The Hedge Fund Hazard

PAUL KANGAS: The stock market has been rocked by volatility as it copes with the financial crisis. Market insiders say sales by hedge funds are causing many of those gyrations. The mostly unregulated investment partnerships are one factor behind the market's late-day freefalls and as Scott Gurvey reports, Wall Street pros see more hedge fund selling ahead.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hedge funds are often highly leveraged. They must sell assets to meet margin calls in a falling market and to raise cash to meet redemption demands from investors. These sales are putting downward pressure on stocks. Hedge Fund Research, a Chicago-based firm, says the value of assets held by the funds fell by $210 billion in the third quarter. Investors withdrew over $31 billion, the largest net capital redemptions in the industry's history. Fund manager Whitney Tilson says many funds are in chaos.

WHITNEY TILSON, MANAGING PARTNER, T2 PARTNERS, LLC: A lot of funds are being hit with a double whammy, of being, of delevering both as a risk mitigation tool, but also because they're being forced to. They're getting margin calls from their prime brokers and then that combined with investors redeeming is a double whammy for a lot of hedge funds that's putting them under tremendous pressure and the only way to mitigate that pressure is you got to sell what you own.

GURVEY: Hedge funds often sell late in the day when they have an idea of what their margin and redemption requirements will be. Half of the recent market declines have come in the final hour of trading. Drew Chapman, a lawyer representing funds, says we can expect still more sales.

DREW CHAPMAN, PARTNER, DLA PIPER: I think redemption requests are going to continue. November 30 is obviously I think the last day I guess of the year. Funds are usually on a quarterly or a monthly redemption cycle and November 30th is going to clearly see more and more redemptions come through.

GURVEY: While most individual investors fear the volatility, Art Cashin, who directs floor trading for UBS, says it can be played to your advantage if you place a limit order naming your price.

ARTHUR CASHIN, DIRECTOR, NYSE FLOOR OPERATIONS, UBS: If you're going to expect selling in the final hour and you're thinking about looking for bargains, that's the perfect time. You put in a silly bid and if there is that heavy selling look, you got a bargain. And if there's no heavy selling, you didn't buy anything. So I think you have to look at it as opportunities more than anything else.

GURVEY: There are about 10,000 hedge funds and some market watchers believe due to the financial crisis, as many as one third will close up shop in the months ahead. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.