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Hedge Funds Now Advertising Ultra Short-Term Liquidity Exposure As Market Becomes A Day-Trading, Speculative Venue
It is one thing for HFT's to end each and every day in "all cash", once the daily stock churn is exhausted, having made a few risk free dollars from collecting liquidity rebates and from pushing NBBOs around from all that bid stuffing. It is something else for big, macro funds to advertise that their asset exposure is of the most liquid variety. While reading an investor letter from just such an asset manager, the following data from caught our attention: the fund advertises that 100% of its assets have a sub-1 day liquidity.
The fact that ultra-short term liquidity is now a selection bias for hedge funds is a troubling development. On one hand, it is prudent that firms no longer load up with 99% of toxic crap Level 3 which is worth 5 cents but is marked just a little "aggressively" (Dan Zwirn are you reading?). However, a troubling side effect of this development is that little by little most hedge funds are now collectively moving to the 100 or so stocks that account for 50% of market volume (as previously disclosed on Zero Hedge), and are incentivized to do so, knowing full well that investors/LPs will put their money only where it is most liquid and can be withdrawn on a moment's notice. The sad consequence is that from moving to one extreme, Level 3 gone wild, demonstrated by the period 2005-2008 when most hedge funds had the bulk of their assets in illiquid second liens and other "special situation" lunacy, the opposite is true now, and few are willing to put their capital into even medium-term locked up securities. The bottom line is that this merely makes the maturity transformation mismatch so extensively discussed previously on Zero Hedge such an increasingly important issue. Since nobody is willing to take term exposure risk, typically manifested by reduced asset liquidity, the bulk of investment will focus on zero maturity products such as the most liquid of IG and HY bonds, ultra liquid stocks (about 2% of all) and low-yielding overnight securities. Has the market's fascination with liquidity destroyed not only the ability for long-term capital formation and the ability to allocate capital to riskier asset classes, but made the entire market a bandwagon chasing liquidity, where as a result everyone will end up on the same side of the most illiquid names (AAPL being a key example), and when the inevitable bad news comes and everyone wants to sell, there are no buyers?
And as a tangent, in the same letter we notice another new development in hedge fund exposure disclosure: namely, the fund's exposure to various Prime Broker counterparties.
How soon before tracker firms begin to collate this data and determine which prime brokers are seeing an outflow of capital, as the hedge fund community is seen as the most forward looking advance indicator of trouble at a given bank. If allocations to PBs drop steadily, will it result in yet another bank run based on nothing but a self-fulfilling prophecy of negativity (incidentally, naked shorting would have nothing to do with it - if the entity ends up being viable after all, all those who have overshorted the stock (just like JPM's shorting of gold), will merely suffer losses commensurate with the excess overshorting, while those who took the other side of the trade will generate profits.)
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Less than a day. The new "long?"
If you hold over a few seconds, you must really believe in the company.
So you should pay high management fees and other expenses for what....?
So dumb money can help support the care and feeding of the HFT computers and the TBTF banksters. Just another way to steal dumb money while also allowing banksters to create another way to gamble in Wall Street's NYC version of Nevada's Lost Wages.
And it speaks volumes as to their feelings of "confidence" in this market and in investment valuations...
Is this the new "buy and hold" ?
Nope Sod, it's the Bye bye and all-holds-barred!
ORI
http://aadivaahan.wordpress.com
What? Less than 1 day liquidity? Nevermind.
we need more regulation to put a stop to this.
What we really need is for the house of cards to come down and for us to start over.
There will be no regulation that will make markets fairer for the retail investors. All of the regulators are captured, and we can only hope that they sleep and watch porn all day since they will NEVER help you.
Nope.
We do not need more regulation.
What we need is failure, responsibility and culpability.
Success does not exist without failure. In outlawing failure the US has also made success impossible.
Everyone gets a merit badge - Mazel Tov.
There is so much failure swept under the rug, we have more of the financial world under the rug than outside it. Big ole lumpy rug. Few are fooled anymore but everyone is afraid of the monster under the rug. I'm with you. I'd love to clean house. Action-->Consequence.
To hold something for even a few seconds in todays climate is toooooooooo dangerous ......................................................................
how may this news affect the stocks tomorrow:::
http://noir.bloomberg.com/apps/news?pid=20601087&sid=a8hYpvp6aFho&pos=1
Baltic Dry Index called this one, Bitchez.
From Bloomberg, July 28th 2010, short excerpt.
Weakening Trends
At the same time, the Baltic Dry Index of shipping costs collapsed to a low of 663 on Dec. 5, 2008, from its peak of 11,793 on May 20, 2008. It rose through 2009, but has dropped more than 50 percent since the middle of May. This mostly reflects declining world steel production and car manufacturing.
Animal spirits followed much the same path as the Baltic Dry, picking up strongly through 2009. Now they have stalled, even going into reverse in the past few months. It turns out this isn’t unique to the U.S., but has also occurred in the U.K. The worry is that they are heading down once again.
This might help the short side on the Australian market today... If you want an indication of lead watch the ASX300 resources index.
It won,t.A meteorite or comet hitting the earth,the sun going out,Barrack Obama saying America is bankrupt and calling in the receivers,Lord Lucan turning up, no matter what happens the market won,t seriously go down any more because it is a joke just like the recovery which is always just around the corner,bloody long corner ................the more it refuses to accept the true state of things the worse its going to get .............. just like the Gold price being manipulated by paper ........... if you had the loot to buy physical by the ton no-one would sell to you because the quantity is not there because central banks and Governments are too afraid to sell.The truth will come out and then it will be like a pack of cards ...............
Investment and underlying value means means little these days. A rigged game to be sure. Investment and jobs will migrate to honest markets. A continuing sad trend for a once great country that has fallen on hard times.
They are obviously selling this crap to somebody - or they wouldn't be profitable. GET THE FUCK OUT OF THIS MARKET!
+100 The Founders would be so proud of us... <sarc> They keep coming up with ways for us to escape the sentence for just a while longer. When the programs seize up, the unwind will be swift and furious... they seem to have no idea what they have built. (More genius short-term thinking)
May I present to Zero Hedge....
ECONOMY HONESTY CHECKLIST
Honest precious metals market - NO. Degenerated into a fractional reserve system 2.2% backed by physical metal, there is no chance for all holders to claim physical metal (see GATA, COMEX, CFTC, etc)
Honest stock exchange - NO. Quote-stuffing to the tune of thousands of quotes per second, front-running at millisecond rates (HFT). Increasing valuations at decreasing volumes.
Honest currency - NO. Backed by nothing and legal tender for every enforcable debt, central banks can create additional claim on your labor out of thin air at astonishing rates (FED, Rothschild, etc).
Honest statistics - NO. Underestimated inflation, which is rather 12% than 4%, and hence a seriously overestimated Gross Domestic Product (including recent numbers).
Honest leadership - NO. Telling the hard truth, bothering people with explanation of realities is seen as political suicide. Playing on false hopes and feelings increases ratings.
Honest media - NO. Concentration has never been as large in the media industry. The media's role as a balance against government power is diminishing along with its diversity of stakeholders.
Note that these issues are not limited to the U.S., although they are prominent there, but many other countries as well.
Day by day, the equity markets are more and more resembling a rigged card game, where the overwhelming majority of players will always lose to the dealers, namely the HFT players. I no longer invest in the US markets. They are simply too crooked.
Judging by the comments, it seems folks accept this news at face value. Maybe I am too slow here, but isn't there still a buyer for every seller? Since JohnQ is supposedly sitting out this market, who is left to buy?
Also, if a significant number of hedgies thought cashing out every day was a good idea, wouldn't we see some type of reversal every afternoon? Wouldn't that trend then become trade-able for non-cashing-out hedgies?
IMHO, this "news" is over-exaggerated. If there is/was significant profit to made with 100% daily liquidity, after paying the HFT toll, we would all see it in the market.
It's not "news". Readers here have known this since ZH hung out it's shingle, it's just this weekend there are pretty pictures to go along with it.
VFSV, Some good points but your perspective is a bit narrow. Keep in mind even if you could trade the trend during ´normal´markets, how do you protect yourself against another flash crash? Also the resources needed for HFT are far beyond those available to smaller investors. Do some research and possibly save yourself financial grief.
You discount the fact that TBTF banks have access to unlimited capital courtesy of the Fed (at the taxpayers' expense). This is why the charade will continue for a while..
It would be one thing if the rigged game was just an advanced skynet version of vegas. But it's worse. In reality it's being used to rip off everyone indirectly with the politicians and law enforcement protecting the system like local law enforcement protects a mob because they receive a piece of the action. It's so complex now that law enforcement and politicians don't even know they are protecting it. Technically - it's because IQ and politician rarely comes in the same DNA package. Whether through Government protected pensions, 401K's, your taxes covering bailouts or being fleeced by investment houses who are equipping you with Atari 2600 software to compete against supercomputers - Oligarchs are robbing the working class (which includes the UMC) all in the name of saving the little people because they know whats best for you. Nobody cared while they got their chunk of the Ponzi scheme from the top to the bottom but now people are at least trying to look under the hood and see just where all the skimming and shanangans are stealing their labor output.
On another note - I wonder if the real reason the US doesn't permit the best processors in the world to leave the country isn't because of the military advantage it might provide but because of the HFT edge they absolutely provide.
That's an interesting quandary, do non-US investment houses and governments have identical co-Locations of servers with like processing power near APOP grade routers or do export & SEC laws strictly prohibit those things from being possible?
Regarding exports of computer horsepower... I had to answer my own question...
Source - http://en.wikipedia.org/wiki/FLOPS
Following the white rabbit it looks like Computer horsepower Export controls are based on "APP", for the real geek in you, read the quote, otherwise, skip ahead.
Source: http://www.cramster.com/reference/wiki.aspx?wiki_name=Adjusted_Peak_Perf...
Lets look at how Sun Microsystems (Oracle) references this - certainly a fine purveyor of servers probably found in dark pools and exchanges. Again, we see the APP reference and now a mention of "Tier's""
Source: http://www.sun.com/sales/its/hardware/
So now it looks like we have to have a look at the High Performance Computers from the US Bureau of Industry and Security and it's various tiers:
First It's interesting to note that in 2001, Clinton merged Tier 1 and Tier 2 countries, creating a more simple 3 Tier computer horsepower export control system.
Source: http://www.bis.doc.gov/hpcs/archivednewsitems.html#020306
That leads us to the Tiers as they stand today:
Source: http://www.bis.doc.gov/hpcs/default.htm
So I guess you can hang out in Kenya or Honduras and compete with the bigs with your 1.21 Weighted TeraFLOPS computer but good luck with that latency and hop count! China? You know the one who keeps the marry-go-round going buying our treasuries? Well, no, they can't play with our horsepower, but something tells me they probably have their own... or we just keep writing exceptions to the rule in export law so that Walmart can keep turning out cheap crap at 40,000 american flags per second.
TD, why blackout the PB composition?
Also, since the money market has nowhere near as much return as a HF requires (and forget level 3 shit as you say), we can probably ponder the sub 1-day liquidity simply consists of medium to big cap stocks where they can effectively close out their position within 24 hours.
TD, why blackout the PB composition?
Had to get the lead out.
There is a buyer for every seller,but who are the buyers and what are they buying with.Look at all the QE money that is being printed into existence,how much keeps this stuff going up.Imagine all the managed and pension funds that have to invest money in the markets every month to get a return,lets be honest the average working Joe does not understand it and never questions it as long as it looks good and people he knows who have retired get paid he thinks its a good thing and keeps on paying his contributions.The market has to be kept at a level to pay returns.If the markets were allowed to reach their true value by people in the know the assets of the funds and pension funds would be virtually worthless,companies could not borrow money because their shares would be worthless,the true state of affairs would come out,confidence would evaporate,individuals would want their investment back which of course would probably be worthless and the markets would be worthless.So QE money keeps the whole thing looking respectable,fiat money is kept worth something but somewhere down the line more and more people would smell a rat,start to take their assets out,first as a trickle then as a flood.If the masses don,t get wise the ponzi scheme keeps on going until another new generation who haven,t been burnt gradually become involved and then its crazy fees time again.Only this time it will be different because too many people are suffering and do not believe in this house of cards any more.And every QE $ printed devalues your wages,pension and investments,don,t believe this is to pay off debts the only way to handle the now unaffordable and unpayable debts without totally destroying the system is hyperinflation and its on its way.
They call it "RISK OFF." Even John Williams excellent work over at shadow stats can not acculturate convey the contraction in M3.
Velocity nil, Deflation GAME ON.
If it were not for the consumer getting hammered in non-discretionary the last 18 months we would see this already. Now, Even that has come to a halt, as J&J and the rest now show no pricing power. The only thing left to go up is taxes. All signs were of returning 401k inflows, Q3-4. Where is all that M&A we are waiting for? All this may change in a hurry.
I've always accused Wall Street of not being able to see beyond the end of its nose. But, limiting your vision to the inside of your eyelids just makes no sense.
Liquidity available instantly - until it isn't!
How many funds are doing this? What $$ volume in these funds?
Decreasing volume and daily round trip for entire fund(s)? Is there anyone real trading?
- Ned