Hedge Funds

Some time ago, I mentioned that because hedge funds do most of the trading on Wall Street, their actions must affect the market in some unexpected ways. I think that I am beginning to see some specific examples. Around the first week of August, Peets Coffee had a sudden rise in price on high volume. I could not find any news that could explain it. It now appears that some hedge funds were short on Peets and they were forced to buy the stock back when they got margin calls.

At around the same time, the market as a whole was going down in a dramatic fashion. I could not understand why gold and gold mining stocks were going down as well. Usually gold advances a little bit in periods of uncertainty. It now appears that hdge funds were forced to sell gold and gold related stocks to raise cash. Since then, gold has rebounded.

I do not pretend to know what the hedge funds are doing, but history shows that profitable trading strategies will become unprofitable if a lot of people are all doing the same thing. The strategy becomes a game of musical chairs. There are a lot of hedge funds now and they are all doing the same sort of thing. This will not end well for their investors.

At the end of the day, a value based investment approach - as taught by Benjamin Graham and practiced by Warren Buffet and others - will always succeed in the long run. The volatility being created by hedge funds will open up even better opportunities for value oriented investors.