“Hedge funds set the price of stocks”

ConvergEx strategist Nicholas Colas has just spent the week in London meeting with institutional clients of his brokerage firm. He relays the fact that London is now the quintessential globalized financial center (centre?) and that it’s filled with oligarchs from around the world and the high performance sports cars they so adore. London is spotless, filled with cranes and everyone is bullish on both the stock market and the continuation of their luxury property boom. In a postcards format, we get lots of other tidbits, my favorite being this bit about how hedge funds are the dominant factor in terms of how individual stocks move day to day.

Postcard #2: Hedge funds set the price of stocks over the near term. I heard this both from the investor relations professionals at public European companies as well as brokers and investment managers in the City. Market structure is different across much of Europe from the U.S., so you don’t hear much griping about high frequency trading here.  Instead, the popular perception is that marginal price is set by fast money hedge funds. A recent selloff in European small caps, for example, stemmed from chatter of a liquidation/team dismissal at one London based hedgie.

This narrative is especially popular among public companies. While they look for stable long-only money to comprise their core shareholder base, they also recognize that hedge funds will set the near-term price action in their stock. They aren’t entirely comfortable with that paradigm, to say the least. They fear that a meeting with a hedge fund will lead to a short position or, worse yet, a bear raid by several funds. At the same time, they recognize that hedge funds often know a lot about their business and are quick to find positive catalysts to justify an aggressive (and market moving) buildup of a new long position.

Source:

Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York.