Hedge funds may post their worst month in at least five years after bets on financial stocks falling and on crude oil rising backfired.
Hedge Fund Research Inc.'s Global Hedge Fund Index of more than 55 funds slid 3.2 percent through July 24, heading for the biggest monthly drop since the measure started in 2003.
Wagers on a decline in financial stocks and homebuilders, one of the most popular, soured after Fannie Mae and Freddie Mac shares more than doubled in the six trading days to July 23. Bullish bets on crude oil turned to a loss as oil slid 15 percent from a record $145.29 a barrel on July 3 after doubling in a year.
``You have to believe that everyone had the same trade on,'' said Paul Meader, co-managing director of Corazon Capital Management, a Guernsey, Channel Islands-based manager with about $1.2 billion, mostly invested in hedge funds. ``There will be a lot of people hurting and licking their wounds with a tough July to report to their clients.''
Short selling of Fannie Mae and Freddie Mac jumped in the first two weeks of July as the stocks fell on concern that shareholders would be wiped out even if the government bailed out the entities. Instead, the shares doubled in six trading days, catching out investors who shorted the stock, selling borrowed shares in anticipation of buying them back at a cheaper price.
All the "smart" money is leaning the same way!
Not so smart!