Jim Cramer say Stock Market Controlled by "Hedgies"

[on-ramp]

I happened to catch a few mins. of Mad Money today...

Jim Cramer (in the business for 25 years) basically stated that the stock market is controlled by Hedge fund managers, about 100 of them, responsible for the daily upswings and downswings of stocks.

Is that what investing is all about? Buying a stock and hoping the "big boys" will run it up? or catching the next wave... sounds like a big game to me, with no control and all the risk in the world.

I personally don't have 1 single dollar in the stock market because I believe Wall St is as corrupt as our government.

any thoughts?

[jyl]

Hedge funds represent something like 1/2 of daily trading volume in the US equities markets. (I don't have a citation, but this is what I hear from the big brokerages)

There are a relatively small number of big hedge funds (>$1BN assets) and a large number of small ones. I would not be surprised if the top 100 hedge funds comprise the majority of total hedge fund assets under management.

Many hedge funds use leverage, e.g. use borrowed money to trade $2BN of securities with $1BN of actual assets under management. (I think 2-to-1 leverage is fairly typical, for equities.) I would think larger hedge funds are more able to use leverage than the $50MM and $100MM guys. If true, then the top 100 hedge funds probably represent more than a majority of total hedge fund trading.

In other words, hedge funds are likely the primary factor in daily stock volatility, and I agree with Cramer - not that he cares.

The impact is most obvious on the short side. Of the hedge funds trading equities, I think (again, what I've heard and seen, not hard data) the majority are long-short who try to stay roughly market neutral. In other words, somewhere between 60% long 40% short and vice versa. This means some very large short positions. That is why, for example, in the current earnings season you're seeing big one-day short-covering rallies. See one-day moves for NEXT FORM VSEA ONNN etc.

However, unless you're a hedge fund yourself, the day-to-day moves should be far less important than the longer-term moves - 1 year, 5 years, 10 years.

Hedge funds have much less influence on those longer-term moves.

Longer-term moves are based on more fundamental factors like economic cycles and growth, industry structure, company fundamentals, interest rates, wealth creation, and asset allocation between asset classes and countries. (Not an exhaustive list, but the point is that day-to-day hedge fund trading is not on the list.)

So assuming you have a longer-term horizon, your decision to be in the market or not shouldn't be greatly affected by daily volatility.

[legion]

I was a finance major in college (1996-2000) and watched the markets closely during that period of "irrational exuberance". I think this hypothesis dovetails nicely with what I have witnessed. I long thought the market was mostly sheep, I could never figure out who the herders were...

[on-ramp]

Originally posted by jyl
Hedge funds represent something like 1/2 of daily trading volume in the US equities markets. (I don't have a citation, but this is what I hear from the big brokerages)

There are a relatively small number of big hedge funds (>$1BN assets) and a large number of small ones. I would not be surprised if the top 100 hedge funds comprise the majority of total hedge fund assets under management.

Many hedge funds use leverage, e.g. use borrowed money to trade $2BN of securities with $1BN of actual assets under management. (I think 2-to-1 leverage is fairly typical, for equities.) I would think larger hedge funds are more able to use leverage than the $50MM and $100MM guys. If true, then the top 100 hedge funds probably represent more than a majority of total hedge fund trading.

In other words, hedge funds are likely the primary factor in daily stock volatility, and I agree with Cramer - not that he cares.

The impact is most obvious on the short side. Of the hedge funds trading equities, I think (again, what I've heard and seen, not hard data) the majority are long-short who try to stay roughly market neutral. In other words, somewhere between 60% long 40% short and vice versa. This means some very large short positions. That is why, for example, in the current earnings season you're seeing big one-day short-covering rallies. See one-day moves for NEXT FORM VSEA ONNN etc.

However, unless you're a hedge fund yourself, the day-to-day moves should be far less important than the longer-term moves - 1 year, 5 years, 10 years.

Hedge funds have much less influence on those longer-term moves.

Longer-term moves are based on more fundamental factors like economic cycles and growth, industry structure, company fundamentals, interest rates, wealth creation, and asset allocation between asset classes and countries. (Not an exhaustive list, but the point is that day-to-day hedge fund trading is not on the list.)

So assuming you have a longer-term horizon, your decision to be in the market or not shouldn't be greatly affected by daily volatility.

John,

please try to stay on topic

[jyl]

OK, how about pooper receiving?

Can't believe I said that.

[hytem]

Individual company stocks have always been volatile, due to short-range trading by short-term investors.

What's disturbing is that mutual funds are now almost as volatile, because of computerized trading and because some investors are trying to time the market with them like individual stocks.This defeats the whole idea of mutual funds, which was to reduce the short-term risk by investing in a bunch of companies chosen by a manager.

The Funds are trying to alleviate this problem by restricting short-term buying-selling--especially by computerized trading. Big investors sometimes push buttons unloading large amounts of shares simply after hearing alarming news in the media--often hyped. This is also a problem in the oil futures market, which has resulted in daily volatility of gas pump prices.

[jyl]

Very few people are actively trading in and out of mutual funds. The early redemption fees make this unprofitable. Individual investors don't tend to trade with their 401k investments like that. Why would you use mutual funds for rapid trading anyway - can only get market close price, no intra-day trades.

Exception might be some very focused funds that people use as plays on a narrow market sector. But even there, there are now sector-focused ETFs that you can trade with low transaction fees and intra-day price.

Compare the chart of a mutual fund with the chart of the related market index. For example, compare a large-cap growth mutual fund to the Russell 1000 Growth, a technology-specific fund to the Goldman Technology Index (IGM) or to the Merrill Tech Index (MLO), an oil company fund to the OSX, etc.

You'll see the mutual fund is not significantly more volatile than the market index.

It's not that people are rapidly trading mutual funds - it is that the funds are moving with the market.

[HardDrive]

If you have a short time horizon, then yes, by all means, keep your money out of the stock market.

Ultimately, it is in the best interest of both rich people and the companies if the stock market increases in value over time. Looking at the value month to month in pointless. I don't buy anything I am not willing to keep 5 years.

Current holdings:

VWO (Vanguard emerging markets viper)
BRK.B
TWTC (Purchased at $1.12, current price approx $23)

I also have a mix of mutal funds from various 401k funds/IRAs over the years.

[jyl]

I agree with Wayne, just as I agreed w/ Cramer. I am being very agreeable today, not that either of them care . . .

I would not assign much responsibility to the individual investor for market volatility, either through their trading in individual stocks or through their trading in mutual funds. Individual investors simply don't represent that much of the daily trading volume in the market. The vast majority of trading volume is large professional investors, big institutions and big hedge funds. It is the professional investors who have become increasingly focused on short-term returns.

[turbo6bar]

I take a quick glance at VIX, and I have to ask "What volatility?"

[RoninLB]

Liquidity is good.

Mutual fund liquidity is an vg example of clean US financial mkts. MF fraud is self correcting. They toss around sometimes between $25-50B daily without a mkt hiccup.

Hedge fund liquidity, although it may not as clean, is still an important element imo. The bigger the risk etc.


Currently TB Pickens in the oil patch is a nice act to watch.

other that above I've been stock mkt optimistic for over 2yrs.

[jyl]

I've long used the VIX as a bullish/bearish indicator - VIX at extreme low being a (very short-term) bearish indicator and vice-versa.

Recently I've wondered why, according to VIX, stock market volatility is extremely low, while at the same time it feels like stocks are increasingly volatile.

Don't know the answer, just thinking I should look into it sometime. Some possibilities: (1) stocks are in fact less volatile today than they have been in the past; (2) individual stocks are in fact more volatile but the market indicies are less volatile; (3) the VIX does not in fact measure the volatility of the market.

My gut (again, having done no real work) is to lean toward (3).

VIX is the implied volatility of the SP500, derived from prices on a basket of SP500 index puts and calls. So it is not a measure of the SP500's actual volatility. In theory, it measures investors' expectations of the SP500's future volatility. In practice, I would think it measures the demand for SP500 puts and calls, which would be influenced by how much hedging and speculating is going on, which would be only partly determined by investors' bets on future market direction and volatility.

May never have time to dig into this, but anyway my two cents.

[RoninLB]

Although i don't follow the VIX i would tend to think its use may be to give an idea of investors vs traders? I think it's only a short term indicator?

The last sure win that i had involved the horse jumping over the fence 1/2 way around the track and dropping dead. This happened way back in the late 1960s.

that said i occasionally like using the put/call ratios as a contra indicator.

[jyl]

I've only ever used it as a short-term indicator, I mean short-term like a week. You'd have gone broke, many times over, using it as a long-term indicator.

[Bill Verburg]

Originally posted by jyl
Hedge funds represent something like 1/2 of daily trading volume in the US equities markets. (I don't have a citation, but this is what I hear from the big brokerages)

There are a relatively small number of big hedge funds (>$1BN assets) and a large number of small ones. I would not be surprised if the top 100 hedge funds comprise the majority of total hedge fund assets under management.

Many hedge funds use leverage, e.g. use borrowed money to trade $2BN of securities with $1BN of actual assets under management. (I think 2-to-1 leverage is fairly typical, for equities.) I would think larger hedge funds are more able to use leverage than the $50MM and $100MM guys. If true, then the top 100 hedge funds probably represent more than a majority of total hedge fund trading.

In other words, hedge funds are likely the primary factor in daily stock volatility, and I agree with Cramer - not that he cares.

The impact is most obvious on the short side. Of the hedge funds trading equities, I think (again, what I've heard and seen, not hard data) the majority are long-short who try to stay roughly market neutral. In other words, somewhere between 60% long 40% short and vice versa. This means some very large short positions. That is why, for example, in the current earnings season you're seeing big one-day short-covering rallies. See one-day moves for NEXT FORM VSEA ONNN etc.

However, unless you're a hedge fund yourself, the day-to-day moves should be far less important than the longer-term moves - 1 year, 5 years, 10 years.

Hedge funds have much less influence on those longer-term moves.

Longer-term moves are based on more fundamental factors like economic cycles and growth, industry structure, company fundamentals, interest rates, wealth creation, and asset allocation between asset classes and countries. (Not an exhaustive list, but the point is that day-to-day hedge fund trading is not on the list.)

So assuming you have a longer-term horizon, your decision to be in the market or not shouldn't be greatly affected by daily volatility.

Nicely said

[RoninLB]

yep.. well written with a nice attitude of what markets are all about imo.

[RoninLB]

Dow Theory Seems in Play for Some Bulls
Transportation Average Joins the Industrials At a High; More Gains?


By E.S. BROWNING
February 5, 2007; Page C1

As they try to predict the future, some analysts are sneaking a peek at a 100-year-old investment theory.

Based on the writings of Charles Dow, one of the founders of The Wall Street Journal, it is called Dow Theory.

It is catching people's attention because, until recently, the theory was flashing a yellow warning light about the stock market's future. Just lately, the light has turned green, or very close to it.................

...... Back in October, the industrials were doing well because of hopes that slower economic growth might lead the Federal Reserve to cut interest rates, thus lowering borrowing costs for businesses and consumers. The transports weren't keeping up because a softer economy would weaken demand for their services, since they benefit less from low interest rates than from a vibrant economy.

The transports managed to rebound in October, but flopped again in November, short of a record. Some investors worried that, even though the Dow was hitting records, the gains were too narrow.

As 2007 arrived, new data suggested that consumer spending and economic growth were stronger than previously thought. On that news, both the industrials and the transports could rally. On Friday, although the industrials pulled back slightly from their latest record, set Thursday, to end at 12653.49, the transports hit their first record since May, finishing at 5006.89........

[turbo6bar]

Dow 13000 looks like an afterthought, and yet I stubbornly sit on the sidelines. Oh, well.

[RoninLB]

I'm not knocking the mkt's but i think a correction is past due?

[turbo6bar]

I'm almost ready to throw in the towel, so perhaps we are ready for a correction. I'll just sulk and try to remember the lessons from this round.