December 26, 2012
Hedge Fund Returns Worsen: Is 'Enormous Unraveling' Near?
(the answer is yes. the hedge funds returns are going to be horrible Q4 2012, prompting a high withdrawal Q1 2013. hedge fund investors must give 30 days notice to withdraw and they can only withdraw at the end of a quarter. so we will find out if hedge fund customers will take their $ out end of february to mid-march. if a sizeable # of customers withdraw their $, the hedge funds will have to sell things or buy in shortselling in order to give their customers $. and that brings up another point. with shortselling they must buy in so that they can keep the difference (if in their favor, if they buy in higher, of course, they have to pay, but they may have to reduce their debt in order to satisfy margin requirements. if they have to sell a stock, for instance, in order to pay their customers, this reduces assets and margin, which also squeezes shortselling.
in shortselling, they sell stock and hope to buy back that stock after the price decreases. however, if the stock does not go down and instead goes up, then they have a loss. this loss will subtract from the "excess margin" (assets - debts). if a company has no "excess margin" or negative "excess margin", the company cannot shortsell and they cannot allow their customers to shortsell. hedge funds manage shortselling for their customers and their customers do not shortsell individually. hedge funds are professional shortsellers. high frequency trading firms are also professional shortsellers. some mutual funds and banks are also professional shortsellers. the "excess margin" limits shortselling principally, however excess margin also limits the amount of stock that could be bought on a daily basis. once a company has bought the stock, then the assets increase and they report a higher excess margin for the next day. think of "excess margin" as being a credit card with a limit: companies can buy some stock up to the limit but then the limit increases tomorrow's credit card limit, OR this credit card can fund shortselling, decreasing tomorrow's credit limit.
if customers request their funds back, this will cause considerable pressure on the "excess margin", which squeezes the shortselling they are already doing.)
this article is in plain english about how high frequency trading is profitable to those who engage in it, how the most aggressive high frequency traders are the most profitable, and how the high frequency traders are taking $ out of the stock market, not providing cash liquidity to the market. they provide imaginary stock liquidity because they rarely borrow before they short, they just "locate" shares that they could borrow if they chose to. locating shares increases the # of shares outstanding "temporarily", eating the demand for the stock and driving the stock price downward. this could sound a little bit like price manipulation (yes it is).