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This Is Why the Stock Market Could Crash to a New Low in April

Last Updated September 23, 2020 1:47 PM
Kiril Nikolaev
Last Updated September 23, 2020 1:47 PM
  • Hedge funds are in deep negative territory this year.
  • Funds have blocked client withdrawals to avoid forced selling.
  • Hedge funds will likely sell on every rally to liquidate their holdings.

In March, the S&P 500 plummeted to this year’s low of 2,191.90. The move ended the longest bull market in history. While the $2 trillion fiscal stimulus helped the stock market recover 17% from the low, the writings on the wall indicate that it will get worse before it gets better.

Hedge Funds Are Losing a Boatload of Money

DoubleLine Capital chief executive Jeffrey Gundlach said on Tuesday that he doesn’t believe the coronavirus selloff is over. In a webcast, the Bond King said :

I think we are going to get something that resembles that panicky feeling again during the month of April.

That panic will likely be inspired by hedge funds rushing for the exit as their bets are getting hammered by the novel coronavirus. Financial Times reported that hedge funds are down nearly 10% year-to-date . Many suffered heavy losses in March.

Returns of various funds are in the negative territory
Returns of various funds are in the negative. | Source: Financial Times 

One of Ray Dalio’s funds at Bridgewater Associates was down by as much as 21%. The hedge fund magnate admitted that the coronavirus caught him flat-footed:

We did not know how to navigate the virus and chose not to because we didn’t think we had an edge in trading it. So, we stayed in our positions and in retrospect we should have cut all risk.

Liquidation of Holdings to Ignite a New Stock Market Rout

Dalio’s funds are not the only ones deep in the red.

Others have taken tremendous losses and are shutting doors. Solus Alternative Asset Management LP is closing its flagship fund  and so is Prophet Capital. Both firms cite the volatility caused by the pandemic as the reason for their dissolution.

The emerging theme behind the closure and underperformance of hedge funds is the eventual liquidation of holdings. Many hedge funds are now blocking redemptions, meaning clients won’t be able to withdraw their money. Funds suspend withdrawals so they can buy time and sell when the market rallies.

One hedge fund sees a “dysfunctional” market
One hedge fund sees a “dysfunctional” market. | Source: Twitter 

With the S&P 500 rallying 17% off the March low, hedge funds have the opening to liquidate their holdings to the tune of billions of dollars. The new round of selling would start a stock market rout that will likely take out the 2020 low.

The low we hit in the middle of March … I would bet that low will get taken out,

said Gundlach .

Hedge funds may be biding their time to liquidate their holdings. But once they do, investors will likely panic. The writings on the wall suggest it will get worse before it gets better.

The above should not be considered trading advice from CCN.com.