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Index suffers as hedge funds bank the profits

Performance fees knocked October’s uncertain markets as hedge fund managers took profits to safeguard their bonuses says Iimia CIO Nick Greenwood.

Greenwood, who runs Iimia’s fund of investment trusts, says that many hedge fund managers have year-ends in October while others were tempted to bank profits four-fifths of the way thr- ough the calendar year with markets entering a period of uncertainty after having been through a bull run.

The FTSE fell from 5,515 at the beginning of October to just over 5,100 at the end of the month.

This week, the index rallied to 5,300 after bid talks relating to O2, Pilkington and P&O but it faces continued uncertainty from rising inflation expectations.

Greenwood says the 0.8 per cent rise in yield on US 10-year bonds, from 3.8 per cent in August to 4.6 per cent this week has also removed a crucial prop from the US equity market.

He says: “I am quite sure that the temptation to bank profits four-fifths of the way through the year leads to markets being affected. We have been in a bull run but, with uncertainty over inflation and bond yields in the US knocking equities, if you are a hedge fund manager paid 20 per cent of the year’s performance and you are up by 17 per cent so far it is highly likely that you will take the money.”

Bates Investment Services head of investments James Dalby says: “Whether what we have seen in the last few weeks has been as a result of hedge fund selling is difficult to say but it is plausible that they have had some impact.”

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