LUXEMBOURG (Reuters) - Fund boutique Polar Capital (POLR.L: Quote, Profile, Research, Stock Buzz) said on Tuesday it has been buying up mid and small-cap stocks from hedge funds forced into distressed sales, and sees further forced selling this year as tough conditions prevail.
The comments from Polar Chief Executive Mark Kary to the Reuters Funds Summit in Luxembourg come after a number of hedge funds have run into trouble as plummeting investor confidence has hit liquidity in some stocks, while tighter conditions from some prime brokers have forced some funds to sell.
Last week Netherlands-based GO Capital Asset Management said it had blocked investor exits from its 601 million euro ($950.3 million) Global Opportunities fund for a year because liquidity has dried up in the small and mid-cap stocks it holds.
"All of a sudden the environment has changed completely. We're now beginning to redeploy the long book in that mid-cap space. Because whether it's GO or Focus or I don't know who, (they) are ... being forced to sell (these stocks) and they're being sold at distressed prices.
"The dislocations you see in equity markets as a result of people getting themselves into trouble and closing funds and either they or the prime broker having to dump stock at distressed prices presents a fantastic opportunity."
Kary, who said he believes that the credit crisis could take longer to be resolved than many investors think, said further forced selling by distressed hedge funds was likely as tough credit and market conditions continue.
"We would have thought there would be a bit more forced selling," he said.
"I think a combination of general market nervousness, de-risking ..., distress elsewhere which (means) more forced sellers and perhaps a deteriorating macro environment ... you'd have thought there would be even better opportunities as we move forward."
SHAKEOUT
Kary also said that the $2.5 trillion hedge fund industry, which has grown rapidly in recent years as investors have been attracted by its ability to make money in all market conditions, could see slower growth in the short-term as investor caution prevails.
Earlier this month fixed income manager Peloton Partners told investors it was liquidating two funds and closing down after "severe" declines in the net asset value of its asset-backed securities (ABS) fund.
It said there was no material deterioration in the quality of assets, but lenders had tightened their requirements, meaning it could not meet margin calls.
"Whether it's Peloton or not, you're seeing a shakeout here and quite possibly you'll continue to see a bit of a shakeout ... You had a bunch of funds that in the month of August were down 30 percent. Well-regarded names, mostly in the quant space, all of a sudden (people ask) 'how is this possible'.
"In that sort of environment (where there is more of a focus on liquidity) I don't think you can expect money to come rushing into hedge funds. A few people are hurt ... (However) I have no issue with the long term trend (of flows into good hedge funds)."
(For summit blog: http:summitnotebook.reuters.com/)
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