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. Mike, Bush has gotten thousands of Americans KILLED in a war designed to enrich his business buddies, and you say he has “kept us safe”? Sure, his buddies are safe, safe with their off-shore accounts. Sure, we have not been assaulted by the WMDs that Bush knew never existed. Sure the Iraqis (those still living, those still in Iraq) no longer have to worry about Sadam Hussein. What about our rights? What about our security? What about our economy?
    Bush, not the Dems, caused this economic disaster. And McCain can be linked to it as well. Bush, not the Dems, gave AlQuida a foothold in Iraq. Bush, not the Dems, sullied our reputation around the globe.
    I have supported Republicans in the past, but not the Bush breed. Not the lying fear-mongering breed. Not the “spend your money on wars and war-profiteers” kind.
    OT: there IS no OT I can add to this … sorry.

  2. “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)).”

    This isn’t true at all. If you need $1 million, you simply put in an order to sell 5000 shares of your $200 stock. To raise the same cash with a $25 stock, you sell 40,000 shares. Either way it’s one order to your broker.

  3. Gary wrote: “Besides Obama may well nationalize Apple and force them to build cheap computers for Africa’s poor people.”

    The comment can be spun in various ways, and I could be wrong, but “I” felt, Gary’s comment is but a thinly veiled racist view. If true, it is sad and inexcusable really. Strong political affinity and deep personal opinions shouldn’t justify this.

  4. “Mike, Bush has gotten thousands of Americans KILLED in a war designed to enrich his business buddies”

    Flat out lie.

    The war was to take care of a serious threat to our national security. I know Sept 11 is convenient to forget, but it proved we can no longer take the threat of terrorism lightly. And no I did not say Sadam planned Sept 11 attacks, no one is saying that. The issue is can we afford to have an enemy of our country who has already attacked other countries and used WMD’s on its own people to continue to possess and produce them? I’d say no.

    “and you say he has “kept us safe”? Sure, his buddies are safe, safe with their off-shore accounts.”

    More lies and garbage.

    “Sure, we have not been assaulted by the WMDs that Bush knew never existed.”

    Disgraceful lie, many people not just Bush thought Sadam had WMDs. It’s still likely he HAD them. Just because we didn’t find them does NOT mean they did not exist.

    There’s a mountain of evidence that WMD’s were moved out of Iraq to neighboring Syria. Some of Sadam’s top military officials have claimed as much.

    Plus when we went in there we found large amounts of chemical suits in bunkers. Why would they be there if Sadam did not have chemical weapons? We know he USED them in the past on his own people. It’s not hard to hide, destroy, or move chemical weapons, they don’t take up that much space. He had plenty of time to do so.

    Bush has not done a good job of continuing to make his case on WMD’s, he’s not an effective or consistent communicator. That does not mean he was wrong. Hitler was a very effective communicator, that does not mean he was right.

    “Sure the Iraqis (those still living, those still in Iraq) no longer have to worry about Sadam Hussein. What about our rights? What about our security? What about our economy?”

    You don’t have rights when you’re dead.

    “Bush, not the Dems, caused this economic disaster.”

    Freddy and Fannie, a Democrat economic disaster through and through. Bush didn’t stop it but it was created and run by the Democrats in congress. Where are our congressional investigations into those 2 companies? Where are their officials being frog marched to jail like Enron? That’s right they are all pals of Democrats in congress.

    “And McCain can be linked to it as well. Bush, not the Dems, gave AlQuida a foothold in Iraq. Bush, not the Dems, sullied our reputation around the globe.”

    Are you aware that Al Quida was in Iraq before the Bush 2nd war there?

    I have supported Republicans in the past, but not the Bush breed. Not the lying fear-mongering breed. Not the “spend your money on wars and war-profiteers” kind.

    Which republicans would that be? The war-mongering “Mr Gorbachev Tear Down This Wall” Reagan?

    Look, Bush has done a lot of things you can criticize him for. You can start with selling out our working class to Mexico, and abandoning the southern border. He bloated the government up with a new medicare drug entitlement that will bankrupt the program for future generation, and not enough cuts were made in the budget to support the cost of 2 wars. Iraq was badly mismanaged after we took down the Sadam regime up until the surge, and yes, we probably did not pay enough attention to Afghanistan.

    But to say that the whole thing was about war profiteering, that’s just disgraceful.

  5. I do enjoy how every time someone criticizes the socialist promises of “The One”, they are accused of racism.

    No need to argue my position with those who do not understand, for they are the ones that never will.

  6. A lot of these Hedge-Fonds apparently shorted Volkswagen stocks.
    Porsche has been buying-up the shares more-or-less openly over the last months and had announced near the end of October that they now owned a very large portion of the stock – meaning that the Hedge-Fonds couldn’t meet their contracts and had to sell a lot of assets in the course, to finance buying Volkswagen stocks, pushing the stock-price beyond 1000 Euro (Volkswagen became the most valuable company in the world during this short period).
    It is believed that 30 or 40 billion dollars of hedge-fonds money was destroyed in this frenzy.
    I believe it’s mostly money from rich people, so who cares…
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