Wednesday, February 11, 2009

Heebner on Margin Calls

A recent article in Kiplinger's noted that Buffett is buying then asked why other fund managers aren't following suit. The answer was instructive:
Many fund managers likely agree with Buffett's sentiments. And at today's prices, they wish they could be like Buffett and buy stocks. However, due to a panicked investing populace, that's simply not possible.

You see, when individual investors elect to withdraw their money from a mutual fund, the fund manager must quickly come up with the cash to redeem those investors. In 2008, equity investors withdrew over $215 billion from mutual funds, spurring a wave of selling by fund managers--even though those managers likely still believed in the prospects of the stocks they were selling!

As Morningstar Director of Equity Research Pat Dorsey explained in a recent video, these stock sales had "nothing to do with fundamentals, nothing to do with the underpinnings of our economy ... no matter what the stocks are, no matter how attractive those assets may be, [fund managers] have to sell them because they need to raise the cash to send those checks out" to their investors.

And that $215 billion doesn't even include hedge fund managers who are forced to sell stocks because of investor redemptions and margin calls!

As master money manager Ken Heebner--skipper of the CGM Focus fund--told USA TODAY, "The reason for the sharp decline is massive selling from hedge funds, not because they want to, but because they have to reduce their leverage ... it's the biggest margin call since 1929."

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