The Power of Hedge Funds

October 16, 2006

There are many that watch Sirius and XM and wonder why it is that these stocks can not seem to move. Some of it is simply market sentiment, and some of it is deep pockets that are looking to either add to or subtract from their holdings. Hedge funds can be a retail investors best ally, or worst enemy. When equities such as Sirius and XM are in their weakest selling season (late summer and early fall), they are susceptible to the whims of those that control large blocks of either these equities, or cash.

Spend some time watching level 2 and you will see some interesting trades. If there is a big seller you can see that happening. The same is the case if there is a big buyer.

In an article about Hedge funds and insider scrutiny in the New York Times, another aspect of Hedge Funds is coming to light. INFORMATION. Hedge funds have access to a lot of information. They can pay consultants to conduct surveys, and have even published those surveys to help their cause. This is dangerous to retail investors because if you are on the wrong side of a trade, you can get smacked about with ease.

Article Excerpt:

Hedge Funds Draw Insider Scrutiny

By JENNY ANDERSON
Published: October 16, 2006

In early March, executives from Movie Gallery, a big movie rental chain, held a private conference call for their lenders to talk about how disastrous 2005 had been for the company. A string of Hollywood flops had kept customers away. More people were recording movies from television instead of renting them from a store. The executives said they needed more time to fix the problems, which included more than $1 billion in debt.

Most of the roughly 200 lenders were not bankers, but hedge funds. And what they heard was supposed to be confidential: it was inside information, as valuable to investors as a tip about an imminent takeover.

During the next two days, though, Movie Gallery’s shares were heavily traded, and its stock plummeted 25 percent.

A coincidence? Regulators are not so sure. The Securities and Exchange Commission is now looking into whether any of the hedge funds on the private call with Movie Gallery took their inside knowledge of the company’s struggles and traded on it. Movie Gallery announced earnings results to the public nearly two weeks after the private conference call.

The Movie Gallery case provides a window onto the growing power of hedge funds in financial markets, and raises questions about their role in how information flows on Wall Street. Hedge funds have become a dominant force in the New York and London stock exchanges, and now account for roughly half of all trading in those markets. But they also have recently become major players in the more opaque debt market, which includes bonds as well as loans, and is more than one and a half times as big as the stock market.

“If hedge funds are privy to inside information and they invest in different securities all over the capital structure, this raises lots of concerns” said Alistaire Bambach, assistant director for the Northeast regional office of the S.E.C. She declined to comment on any open investigation......

Interested SSG readers can catch the whole article HERE via The New York Times

10/16/2006 04:57:00 PM

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