Short the favorate

Hedge funds are responding to tough times in the markets by embracing cannibalistic trading strategies: these so-called “liquidiation-unwind" trades involve hedge funds selling short shares that are widely held by their rivals. Goldman Sachs publishes a list of 50 "very important" hedge fund positions that can serve as a guide for investors pursuing such strategies.

The strategies are designed to make money when hedge funds are forced to sell holdings in response to redemptions by their investors. Because so many funds hold similar positions, forced selling by one can destabilise the strategies of others.

For many hedge funds suffering from this crisis, forced selling to cover redemptions and deleveraging has put downward pressure on such shares. As a result, a favourite hedge fund strategy during the bull market - mimicking the positions of others - has changed. Buying the most concentrated stocks has been a poor strategy during the current bear market.

Here is the example. Once Ospraie Management was winding down its flagship fund last month, one Hong Kong-based manager sent a note urging friends to short energy and mining shares favoured by Ospraie. Some managers say they have been monitoring the positions held by Ospraie so they will be ready if other funds with the same positions liquidate their holdings.

So in today’s market, value investment already lost its ground. Speculation instead took its place and it would put more downward pressure to the market.