How hedge fund liquidations can drive down Apple’s stock price

“During the stock market decline (or ‘crash’) of October 2008, various media outlets have loudly identified the impact of massive hedge fund liquidations as a key ingredient to the huge equity sell-off,” Scott Rothbort reports for TheStreet.com.

Rothbort reports, “However, as an “average” individual investor, how well do you really understand how or why these mysterious investment funds have acted in such a brazen manner?”

Rothbort explores five things that you need to understand about hedge fund liquidations.

1. Meeting Redemptions

2. The FOF Effect

3. Leverage: Let’s say a hedge fund’s leverage is 5-to-1 and it’s redemption time. In order to meet those redemptions, the hedge fund will have to sell at least $5 of investments for every $1 of required redemptions. As redemptions tend to be clustered, the impact on individual stocks from hedge funds liquidating their holdings (to meet those redemptions) will be a magnified and concentrated hit on those stocks, and potentially the overall market.

Since the hedge funds are more concerned about creating liquidity than preserving the integrity of their portfolios during a crisis, the higher priced stocks tend to get sold first. It is far easier to create $10,000,000 of cash by selling smaller amounts of a $200 stock (say Apple (AAPL)) than larger amounts of a $25 stock (say Altria (MO)). And before you know it, that $200 stock has become a $100 stock. “Classic” valuation is thrown out the window.

4. The Futures Effect

5. Extreme Herd Mentality

There’ much more in the full article – recommended – here.

[Attribution: Fortune. Thanks to MacDailyNews Readers “JES42” and “Dale E.” for the heads up.]

23 Comments

  1. It will take a long time for the country to recover from the Obama depression, if ever. People standing in lines for food won’t be interested in buying AAPL.

    Besides Obama may well nationalize Apple and force them to build cheap computers for Africa’s poor people.

    The bay area will be desolate after Obama redistributes the area’s wealth to urban areas like Detroit and the District of Columbia.

    Many of the country’s wealthiest are descendants of slave owners and they will have to sell AAPL in order to pay reparations.

    It’s going to get ugly after the Marxist takes power. Everyone except the ruling class of Obamamites will be poor.

    No money for AAPL…

  2. Gary …
    take of your white pointed head, join the US marines and take a lovely “holiday-adventue” in Afghanistan. 8 Years of capitalist plundering turned your country in a financial wasteland with a lot of haze that makes people blind.
    You seem to forget that it was Bush and the Neocons that got you here…

  3. Bush has kept your ass safe for 7 years you dumbshit! Plus the dems have controlled congress for last two years when everything has gone to hell. Look at how the USA was for the first 6 years compaired to the last 2.

  4. Gary, what in the name of all that is sane are you blathering about? Bush has already shredded the Constitution and McCain has promised “4 more years” and you are muttering about “Marxists”? Bill Clinton, the only president in the past twenty years to pay down the deficit, thinks Obama’s economics work – and they aren’t even talking about my plan to limit the maximum payrolls of C-class executives!
    Your buzz-words are SO “last century”, your fear mongering so childish, how can you hope to be taken seriously? Obama could be as big a dud as Bush – I or II – with no relationship to your drivel at all … but I doubt it.
    OT: the price of Apple stock is not a huge factor in the health of the company. The pile of cash is certainly far more significant. Let the shares drop, at least for now. They will recover. Unlike Dell, Apple does not require their stock to support their loans. Or their purchases of other companies. Or anything else business-related. We stock owners might suffer in the short term – IF we find ourselves needing to sell. But the price will recover, if the market as a whole recovers, and Apple’s over-all position will be improved when it does.

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