Hedge funds' growing sway underlies volatility in European stocks

July 15 - European companies are seeing outsized gains and losses in their shares when they report earnings, a Reuters analysis shows, a trend that has more to do with the growing sway of fast money in the $15 trillion market than with business prospects.

"You have mostly short-term money driving the market," said Krishna Kumar, CIO at Goose Hollow, a macro hedge fund."So, participants who are not interested in the stock for the next five years but are looking at it for the next five days." Reuters analysed share price volatility back to 2016 in order to capture data since the Brexit referendum that year. New regulations since Brexit have splintered trading across a larger number of markets, some of them private and non-transparent, diminishing volumes and making it easier to influence publicly quoted prices.

"They do this by providing liquidity, conducting their own research, improving corporate governance, and undertaking investments which other investors may be reluctant to hold,” Inglis said.While large stock price swings are not necessarily a threat to the functioning of the market, they risk triggering broader problems and can make it more expensive for companies to raise money, experts said.

Both said they had seen more hedge funds focused on shorter-term returns attend their presentation days. The Reuters analysis showed that the swings in the last 12-months in the share prices of these companies averaged 5.13%, up from 4.34% in 2016, with a gradual and consistent rise showing a trend. Faced with losing bets, these funds were forced to buy UBS stock to close their positions, further fueling the market gains, the broker note said. There was little buying by traders other than hedge funds, it noted.Interactive Brokers' Sosnick also said he witnessed a short squeeze of hedge funds on May 7, saying options bets around UBS stock were indicative of their positions.

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