New Hedge Fund Strategy: Cannibalism

As a follow-up to yesterday's post, many of the hedge funds that are being forced to liquidate positions due to redemptions and deleveraging are seeing an opportunity to take advantage of the mass selling (see Financial Times article). Hedge funds will often be holding many of the same securities, either due to using similar strategies, or simply from chasing the same hot securities. As hedge funds begin unloading these positions, selling pressure will naturally cause lower prices and additional selling in a kind of longer-term reverse short squeeze as the number of redemption notices increases. In a effort to profit from the selling, many of the same funds that are being forced to liquidate are now shorting other securities they don't currently own, but believe other funds are being forced to sell. This cannibalistic activity has been especially troublesome to some of the more popular and well known funds, such as at Ospraie, whose positions are more well-known than small, less capitalized funds. The larger funds are also natural targets given that it often takes a while for them to fully unwind their positions, providing better shorting opportunities. With the TARP bailout bill signed into law, and any benefits of the bill potentially priced into the market, we may be in store for more selling until the prey stop being preyed upon.