Is Short-term Hedge Fund Trading, And Not Simply Redemption Selling, Contributing To Market Volatility?

There is an interesting Forbes article that discusses the issue of whether hedge fund selling as a result of redemption notices has been contributing to market volatility (see previous posts here, here, here, and here, on the subject). The article notes that while last Saturday was the 45 day period before the end of the year that is often the one and a half month last chance opportunity to request withdraw of funds as required by some hedge funds, recent volatility cannot be blamed entirely on the forced selling of hedge funds before this date. Many funds have shorter notices, while for some the required notification period is longer. Furthermore, any volatility that was experienced may have been due more to the self-fulfilling prophecy that often follows other calendar events, such as those experienced with the January Effect, option expiration dates, and end of month/quarter trading. Instead, analysts expect that it is more likely hedge funds will systematically continue to sell as needed over the next 12 months in order to meet requests.

Of interest is that many funds have been accumulating cash, with managers eager to deploy funds into a market that some managers feel is depressed and laden with attractive values. While funds are nervous about locking up money in longer-term and possibly illiquid investments, many are also unwilling to simply sit on the cash. As a result, some are engaging in more short-term trading, both from the buy and sell sides, that ironically may be contributing to the volatility being blamed solely on redemption requests. Furthermore, there is an expectation that once redemption requests slow down to normal levels, much of this money will quickly find its way back into the market, generating a rally that could be as large as the one recently seen on the downside, albeit over a longer time frame. Of course, predicting the timing of such a move is difficult, but once previously illiquid instruments such as complex debt securities, private equity, and thinly traded companies start to increase on higher level of trading volume, the market may start seeing the beginning of hedge funds once again throwing their weight, and capital, back into the market.