A cautionary article from Bloomberg News Hedge Funds May Sell $200 Billion More Assets. There is still an awful lot of de-leveraging that needs to be done. A survey by Sanford C. Bernstein & Co. predicts that hedge funds are only half way to meeting their liquidity needs, either due to redemption requests or borrowing covenants. Do not forget the "Yen Carry" trade that we have spoken of many times before. While hedge funds had lots of different strategies in different sectors (equities, debt, derivatives, emerging markets, etc) a great majority had one thing in common. Borrow super low Yen funding, invest in the assets of higher yielding currencies and believe as an article of faith that projected forward Yen levels would never be realized. This went on for over a decade (and more often than not the forwards never strengthened like they were supposed to) and fueled the explosion of leveraged investment strategies. Now as hedge funds are hit with major redemption requests and their lending banks pull lines, it's time to pay the piper. According to Sanford's Adam Parker, "Our conclusion is that increasing cash on the sidelines and quality, liquid stocks used as sources of funds will likely remain a significant issue in the near term,” The trade therefore, is sell what is liquid and buy back borrowed Yen.
On days where equities have skyrocketed and the Yen has weakened I would look for a pretty vicious down trade as these forced hands look to liquidate in size. The S&P is up over 13% the last two days. Look out below. I also expect to see the Yen appreciate sharply as well over the rest of the week.
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