Hedge funds seen behind sell-off in U.S. large caps

By Jennifer Ablan and Herbert Lash

NEW YORK (Reuters) - Big wasn't beautiful on Thursday.

Shares in the largest U.S. companies, including Citigroup Inc. (C.N), General Electric Co. (GE.N), JPMorgan Chase & Co. (JPM.N) and Wal-Mart Stores Inc. (WMT.N), suffered their biggest single-day drop in several years.

The declines were remarkable because in times of extreme volatility such as financial markets have recently experienced, the largest and most diversified companies are seen as one of the safest places to hide.

No more.

The cause could stem from hedge funds slashing their portfolios and selling their most liquid names to meet what many market experts expect to be massive redemption demands given recent market volatility.

"Part of the reason you saw the GEs and P&Gs and stocks like that getting crushed today is that those were relatively liquid stocks," billionaire financier Wilbur Ross Jr. told

CNBC.

"Those were things the hedgies could sell because a lot of them know they need to build up cash reserves to deal with what probably will be some big redemptions," he added.

Bob Doll, vice chairman and chief investment officer of global equities at money manager BlackRock Inc. (BLK.N), said hedge fund redemptions might be behind the large-cap rout.

"That could be part of what is happening, but one day does not make a trend. I sure wouldn't put my hat on it," he said.

According to Ross, August 15 is the day for September 30 redemptions for hedge funds that have 45-day advance notice.

LARGE-CAPS VS SMALL

The decline in large-cap names was vicious. Home Depot (HD.N) fell 5.32 percent, its biggest drop since March 2003; Citigroup tumbled 5.23 percent, its worst fall since September 2002; General Electric slumped 3.76 percent, the most in 18 months; JPMorgan stock was off 5.03 percent, its worst decline since January 2003 and Wal-Mart fell 4.07 percent, its worst since November 2003.

Major U.S. indices fell almost 3 percent after French bank BNP Paribas halted withdrawals from three funds and the European Central Bank pumped a record 94.8 billion euros ($130 billion) into financial markets to stop them from seizing up.

"You had a panic in Europe, with the ECB putting so much liquidity into the system, everybody thought, 'Gee, am I the greater fool here? Do they know something that we don't?"' said David Goerz, chief investment chief at HighMark Capital Management.