Hedge funds caused market crash ?

There were two rumours doing rounds explaining Wednesday’s bungee-jump by the stock markets.

One was that there was a firesale by three India-focussed hedge funds.

The second was that one of India’s big bulls, who has been sitting on big shorts for some months now, has been asked by New Delhi to cover positions and not to try and bring the market down. That there was significant short-covering is true because Nifty Futures volume hit an all-time high of 5.69 crore shares on Wednesday.

Such was the rush to cover, the Sensex recovered nearly 600 points from an intra-day plunge of 954, to close out at 11,328.

“The hedge funds, of which one of them is over a billion dollars, are selling as they have to redeem money to their investors. They are not going to see the prices or value, they will go out and just sell. And, since buyers are absent, the impact cost is very huge,” says Rohit Kothari, CEO, Antique Finance, which primarily deals with corporates and institutions.

Sources said the big bull also had to dump L&T shares to meet mark to market requirements on Monday, leading to a 11% plunge in the stock, which took the share below the Rs 1,000-mark.

The high impact cost on individual stocks is also seen as a reason for spurt in Nifty volumes.

Sandeep Singal, head of institutional derivatives, Emkay Global, said since the market is becoming less liquid, action is shifting to the index.

“People who have been trading in stock futures and stocks are moving to the index, which could be one of the reason for the all-time high volume. Also, organised efforts by all central banks gave a sentimental boost. People who were short were wary of carrying positions over the holiday as if things turn either way and global markets rally, Friday could see a huge gap-up opening. People who shorted did not want to take this chance, leading to a huge covering rally.”

Some technical analysts also feel this could be a sign of things turning for the better.

The previous highest Nifty volume of 5.4 crore shares was clocked on January 21, 2008, when the market took the turn for the worse.

Ashok Jainani, vice-president of research, Khandwala Securities, said record volumes in Nifty futures is a sign of positive divergence. “With the global central banks coming together to ease the monetary situation accompanied by the recent RBI and Sebi moves, the market may have made a significant bottom that should hold for the medium term. We are suggesting our clients to buy strong frontline stocks. The recent dollar appreciation (about 22%) has bolstered RBI’s coffers significantly, which would help government finances and country’s foreign exchange reserves position.”

Gaurav Dua, head of research, Sharekhan also feels the bottom is nigh.

“We are now trading close to 11 times one-year forward earnings. In the past if you see, we have bottomed out around 10-times forward earnings. So the downside risks are not that high. In terms of time, there could be some months to go. In the last two bear runs, the bearish period lasted 85-90 weeks or close to 18 months. We could have some more to go in terms of time correction.”

However, will history be relevant in an unprecedented global crisis?

Experts feel though the crisis around the globe is unbelievable, India is placed much better than most in terms of economic growth and corporate sector health. Indian corporates are a lot less leveraged and the debt-equity ratio is much more manageable than during the last bear run.

Manish Bandi, vice-president, PMS, India Infoline, said there is a squeeze on liquidity with many FIIs on the verge of winding up.

“Worldwide prices are falling because of fundamentals. In India, it is happening on account of the liquidity problems.”

So, he says, in the the event if a turnaround, India will improve faster.

via DNA MONEY