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Hedge Funds Smell End of Bear Market
Sun May 18, 2003 09:47 AM ET
By Elif Kaban
LONDON (Reuters) - Hedge fund managers are beginning to smell the end of a bear market, putting money to work as they turn bullish on equities after months of hiding behind cash.
Nobody is spotting any bulls yet but formerly wary hedge fund managers, who had piled into cash after being whipsawed in some of the most volatile markets in recent history, say the economic horizon is less cloudier and it's time to buy.
In one dramatic swing, European long/short equity manager Hugh Hendry at London's Odey Asset Management has moved from a cash position of as high as 90 percent in March to a net long position of 200 percent in his Eclectica Fund -- a net long bias unheard of in the hedge fund community in the days of the bear.
Hendry, whose fund is up 10 percent year to date, said he currently did not have a single short."This summer could prove to be a bit of a scorcher," Hendry told Reuters."This is a mini bull market. You need a robust mentality to recognize there are times one has to be bullish."
That may be welcome by investors who pay hedge funds big bucks to achieve absolute returns, but were getting no more than expensive cash management from managers who were sitting on a lot of cash for much of last year, scared off by the markets.
Hendry said he was finding plenty on the long side for his fund, currently with over 200 positions, buying bust companies.
Recent trades included buying the debt of telecoms equipment maker Marconi Plc, which is restructuring its debts, and bankrupt telephone carrier WorldCom, and equity purchases in Anglo-Dutch steelmaker Corus and engineering firm Invensys Plc.
"I'm impressed by the sheer number and diversity of stocks which have been trading above their one-, three-month averages. We could see a rally of 50 percent over October lows in the U.S. indices and February-March lows in Europe," Hendry said.
At London hedge fund firm Aspect Capital, Alexander Guillaume, who manages the firm's $122.5 million European long/ short equity fund, said he was"moderately bullish."
"Overall, we seem to have turned the corner. There has been a strong earnings season in the United States. In Europe, some important stocks have surprised the market," he told Reuters.
From six-year lows in March, European shares have bounced 20 percent despite concerns about the fragility of the economy.
MIND THE GAP
To be sure, what these hedge fund managers are talking about is a trading rally. As to whether that could amount to something more substantial, there remains a dichotomy of views in the hedge fund community with others maintaining a bearish stance.
Tony Zucker, an equity manager at Thames River Capital which manages more than $1 billion of hedge fund assets, said the market could go 10 percent lower in the next three-four weeks.
"We've had a fairly extended rally. The prices will come down in the short term," Zucker told Reuters."This on balance is a market to sell into, rather than buy into."
Various indicators watched by hedge fund managers are giving mixed signals on the degree of bearishness in the market.
Volatility indices -- one gauge of market fear -- have come down, suggesting share prices have gone up a lot and investors have become complacent, and that it may be a good time to sell.
But the put/call ratio, a sign of bearishness, has gone up in recent weeks with more players buying put options enabling them to sell than those buying calls enabling them to buy.
That could be a sign that more fund managers are selling into the rally, or could simply suggest higher levels of insurance are being taken out against a possible drop.
Most hedge funds are taking no chances, covering shorts.
"Even if you are the most bearish person on earth, it is very difficult to be short at the moment because the momentum in the market is up," said one manager who asked not to be named.
"The market is trading irrationally on the upside. I've never seen anything like it. From our point of view, being short anything in size at the moment is a very dangerous game."
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