By Svea Herbst-Bayliss
BOSTON (Reuters) - Fund managers who peddle in pessimism by betting stocks will fall are having a disastrous year, but so called short-selling still surged to record highs last month and investors are not yet pulling their money out of those funds.
Wall Street’s rally -- the Standard & Poor’s index jumped 15 percent last quarter -- is bad news for hedge and mutual fund managers who specialise in borrowing stocks they hope will fall so they can earn money by repaying their loans for less.
High profile U.S. short-sellers like James Chanos and David Tice, who earned millions by betting correctly that Enron and Tyco stock would sink, now face heavy losses.
"In a broad market rally like this where people are buying everything, short sellers have had a few terrible months. These guys are having massive problems," said Oliver Schupp, president of the Credit Suisse First Boston Tremont Index.
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In the first five months of 2003, hedge funds that do nothing but sell stocks short lost 14.33 percent, ranking them as the worst performing asset class, CSFB/Tremont data shows. In May these funds managed $1.2 billion, only slightly less than the $1.5 billion the managed at the end of 2002.
Selling stocks short is a strategy that is potentially risky because losses can balloon if a manager is short a stock that is rising. But last year it paid off and funds returned 18 percent because the economy stalled and many companies missed their earnings targets.
Times are tough even for hedge fund managers who use short selling techniques only occasionally.
Industry sources report that Andor Capital Management, one of America’s biggest hedge funds, has lost over 20 percent this year by selling technology stocks short and mistiming the sector’s recent rapid rebound.
But gloomy data haven’t prompted managers to abandon the course or investors to panicking and pull money out.
In fact, industry data show short selling interest hit a record high on Nasdaq and hovered near a record high on the New York Stock Exchange last month. Marriott International, Goodyear Tire & Rubber and American Greetings are among the stocks fund managers bet will fall furthest.
"One reason for the rise in short selling interest is that there are more hedge funds in the market who use short selling. And people think prices will come down again," said Nicholas Bohnsack, investments strategist at research group ISI.
While investors may want to believe a recovery is near, three years of heavy market losses that plunged most mutual funds into the red and made heroes out of hedge funds have dampened their optimism.
Sluggish economic data, including news that the jobless rate surged to a nine-year high in June, suggest companies may not meet their earning targets and stock gains could fade.
In turn, even big-name mutual fund managers like Legg Mason’s Bill Miller, who has beaten the broad stock market for 12 years in a row, are hedging their bets.
"Bill Miller just announced that he has a 40 percent short position in his Legg Mason Opportunity fund and that is huge for him," said Roy Weitz publisher of FundAlarm.com, a mutual fund industry watchdog. "Hedge funds are supposed to use these kinds of techniques, but when Bill Miller does it, that is a very interesting counter trend."
And it fits with what investors want.
"After recent experiences, more people believe hedging is something you want to do. So investors, particularly institutional investors, will hesitate longer before pulling money away from short sellers," said Jane Siebels, who manages $250 million at hedge fund Green Cay Asset Management.
