Take advantage of a year-end clearance sale on Wall Street that rivals anything you'll find at the mall.
Even before news surfaced that Bernie Madoff allegedly fleeced investors by squandering billions in a Ponzi scheme, investors were fleeing hedge funds in a big way.
This exodus, sparked by frustration over lousy returns, has forced hedge fund managers to sell some of their biggest positions to raise cash to pay investors who want their money out. And that has lowered prices even on these pros' best stocks, companies that have made these savviest traders lots of money over the years.
Don't want to wait years to cash in on a rebound? You may not have to.
As the new year rolls in, these "January effect" stocks could quickly begin to rebound as the selling pressure eases.
And it will. Many hedge funds allow investors to take out money only once or twice a year, or, at most, once a quarter. So in January, hedge fund managers won't face these so-called redemptions; they'll be able to hold or even buy back their favorite stocks.
- Watch the video to the right for more new year predictions.
That should give these stocks some room to recover, says George Putnam, a value investor who has been tracking the stocks that hedge funds are dumping so he can add them to his portfolios.
The names to consider
Yes, this happens every year to some extent. But after a particularly rough year that is forcing many hedge funds to sell off or close outright, the selling has been far more pronounced in recent weeks.Experts say United States Steel (X, news, msgs), AK Steel (AKS, news, msgs), Exide Technologies (XIDE, news, msgs), Goodyear Tire & Rubber (GT, news, msgs), Flotek Industries (FTK, news, msgs), Solutia (SOA, news, msgs), Shaw Group (SGR, news, msgs), Ingersoll-Rand (IR, news, msgs), Freeport-McMoRan Copper & Gold (FCX, news, msgs) and Huntsman (HUN, news, msgs) have been getting hit particularly hard by hedge fund selling recently.
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Of course, in this market, ugliness could swamp some stocks as 2009 rolls in. So even this year, the January effect -- traditionally used to describe the rebound in small-cap stocks that are beaten down by year-end selling -- for any single stock isn't a lock.
But these stocks also look like bargains for anyone with a long-term horizon, because they've been driven down as much as 94%, Putnam says.
He's worth listening to on the subject of spotting bargains because he pens a top-ranked newsletter called The Turnaround Letter. In a recent issue, Putnam suggested buying all of the stocks above except Huntsman. And even Huntsman has started to look more attractive recently because of heavy insider buying after a sell-off.
The hedge fund fiasco
Before we take a closer look at these stocks, here's more on why hedge funds have been selling them so relentlessly, creating bargains for you.Reason No. 1: lousy performance. After handing investors respectable gains for 16 of the past 17 years -- regardless of how the market did -- hedge funds gave investors a lump of coal this holiday season. Overall, hedge fund investors lost 18% through the first 11 months of 2008, according to Hedge Fund Research of Chicago. But investors in stock-oriented hedge funds lost even more: 26%.
True, that's better than the 37.6% decline for the S&P 500 Index ($INX) in the same time frame. But investors pay hedge funds big bucks to do better than double-digit losses. So they are yanking their money. Hedge Fund Research estimates investors pulled $40.8 billion in October, way more than the $31.7 billion they took out during the entire third quarter.
Reason No. 2: Close a fund, go back to "Go." Hedge fund managers typically make their millions by taking 20% of the upside they earn for investors. But here's the catch: After a terrible year like 2008, they can't collect by merely recouping some of those losses. They have to get all the way back to break-even to start collecting that 20% again. Instead of facing that slog, hedge fund managers are shutting their lousy funds, to start fresh with a new benchmark. "It's just a way of making sure they get their fees," says Tim Ghriskey of Solaris Group, which runs hedge funds.
Hedge Fund Research estimates more than 920 funds will close this year -- nearly twice as many as last year and around 10% of all hedge funds. When they close, of course, they have to dump all their positions.
The fund groups Tontine Associates and Ospraie Management announced earlier this year that they would close hedge funds. Citigroup (C, news, msgs) is liquidating its Corporate Special Opportunities hedge fund, and Citadel Investment Group is closing its "special situations" group, which made bets on particular events, such as mergers and acquisitions.
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