Making the Case to Buy Amid a Market Soaked in Hedge Fund Dread

  • Eaton Vance, BMO Global among fund managers adding positions
  • Long-term investors jumping on short-term volatility

Caught in a market rout that has investors retreating from risk faster than any time since 2011, fund managers with longer-term objectives are borrowing a phrase from wartime Britain: keep calm and carry on.

Rather than panicking in the midst of a selloff that’s wiped out more than $8 trillion from global equities, “avoid making emotional decisions,” advises David Joy, chief market strategist at Ameriprise Financial Inc., which oversees $766 billion. A case can be made for playing offense: “If you’ve got an opportunity to put cash to work over time and you can do so in a patient way, I think you should begin taking advantage of that.”

Investors with longer horizons say they’re hanging on in a market fraught with short-term moves, where pessimism begets pessimism and professional speculators have taken over. Meanwhile, debate rages about whether the stock swoon signals a recession, even as signs of weakness in the world’s largest economy remain subdued. Like Joy, other fund managers say the volatility is creating bargains.

On Thursday morning, Eaton Vance Corp. was buying shares of investment banks and consumer-discretionary companies, said Eddie Perkin, who helps oversee $311 billion as chief equity investment officer in Boston. Indexes tracking those stocks in the Standard & Poor’s 500 Index have fallen at least 12 percent this year, as valuations in the broader gauge have slumped to the lowest level since October 2014.

“You have to avoid the temptation to become paralyzed,” he said. “You’ve got to have an independent judgment that you’ve formed from doing deep analysis on these companies and then have the courage and your convictions to act in the face of other people’s panic.”

Whether it’s panic or positioning, much of the volatility is being caused by hedge funds, according to Brian Rauscher, chief portfolio strategist at Robert W Baird & Co in New York.

“This selling certainly isn’t coming from long-only accounts,” Rauscher said. “What’s driven the market is the hedge fund people that drive it up one day and down the next -- they shoot first and ask questions later.”

Companies with the highest portion of hedge fund ownership have borne the brunt of selling this week, according to data compiled by Bloomberg. The 600 companies in the Russell 3000 index most owned by hedge funds are down an average 6.1 percent this week, compared with a decline of 3.3 percent for those with the least.

Selling by hedge funds, particularly deleveraging by long-short managers, was cited among the main risks for stocks mentioned in a note Thursday from Marko Kolanovic, the head of global quantitative and derivatives strategy for JPMorgan Chase & Co. He also cited sales by pension and wealth funds and retail investors.

Equities rose after five straight days of declines, as the S&P 500 advanced 1 percent to 1,847.02 as of 9:41 a.m. in New York after closing at the lowest level since April 2014 on Thursday. A yearlong decline in global equities became a full-blown bear market Thursday as the MSCI All-Country World Index’s decline since May surpassed 20 percent. The gauge also rose for the first time in six days, adding 0.3 percent.

The sheer size of the fall has probably forced margin calls for many investors, adding fuel to some trades that already seem irrational, said Walter Todd, who oversees about $1.1 billion as chief investment officer for Greenwood Capital Associates LLC in South Carolina.

“In certain areas of the market, it definitely feels like some type of liquidation event, whether that’s from sovereign wealth funds or hedge funds,” he said.

While Greenwood isn’t “aggressively” buying, even a willingness to “nibble a little bit here and there” seems daring, he said. Likewise, the year-to-date selloff has opened the door for BMO Global Asset Management, with $237 billion in assets, to add to high-yield and equity positions, said Jon Adams, senior investment strategist and portfolio manager.

“We’re decidedly out-of-consensus to be overweight equities and high-yield right now,” Adams said. “A lot of the focus is on the short-term drivers. The main difference for us is we do have a long-term time horizon -- we’re not day-trading by any means.”

As a result, short-term market participants are opening the door for their counterparts. What’s more, with negative momentum feeding on itself, that’s helped push global stocks near a 20 percent plummet since May.

“Once the headlines blare bear market, it’s going to create more angst, it’s going to add more pessimism to a market that’s already pretty pessimistic,” said Leo Grohowski, who helps manage more than $184 billion in client assets as chief investment officer of BNY Mellon Wealth Management in New York. “If investors have a time horizon measured in quarters or years, I think this will turn out to be a better entry point than exit point.”

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