Thursday Tumble Leaves Hedge Funds Unscathed

May 10 2010 | 4:55pm ET

Hedge funds appeared to have weathered Thursday’s stock market mayhem—when the Dow Jones Industrial Average plunged nearly 1,000 points only to quick rebound about an hour before the New York Stock Exchange closed.

Two investors with client money in dozens of hedge funds told The Wall Street Journal that they expected one-day losses of no worse than 5%. Prime brokers told the newspapers that smaller hedge funds could have lost as much as 20% on the day, but losses of that magnitude were few and far between.

Major U.S. exchanges decided to cancel any trades made between 2:40 p.m. and 3 p.m. on Thursday at 60% above or below a stock’s price at 2:40 p.m.

Meanwhile, regulators continue to try to figure out why the market took its unprecedented dive. The Securities and Exchange Commission and Commodity Futures Trading Commission are gathering data from exchanges, and have taken anecdotal reports from hedge funds and other market participants.

The failure of electronic exchanges to slow down in tandem with the New York Stock Exchange is currently considered the leading possible culprit. The NYSE imposes a controlled slowdown in such situation to boost stability on the markets.

Prime brokerage Terra Nova Financial was also fingered as a possible culprit by TheStreet.com. According to the Web site, Terra Nova’s trading in Procter & Gamble, a constituent of the Dow 30, may have contributed to P&G’s precipitous decline on Thursday.

Terra Nova has denied the Street report, saying it was “not aware of any link between Terra Nova and the unusual trading activity and wide market price changes” in P&G shares.


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