They're shorting bonds of debt-laden firms: Pimco
BILL Gross, manager of the world's largest bond fund, said short sales by hedge funds may have helped pummel bond prices in recent months, creating new risks for holders of corporate debt.
Bond managers 'should find those corporations with attractive long-term fundamentals and stick with them,' Mr Gross said. The manager of the US$55 billion Pacific Investment Management Co Total Return Bond Fund made his comments in an investment outlook on Pimco's web site.
Mr Gross' criticism of hedge funds comes after Pimco, a unit of Allianz AG, lost more than US$200 million from investments in WorldCom, Sprint and other telecommunications companies. The fund manager said his return to buying corporate bonds this year after avoiding them for several years was 'premature.'
'Due to the increasing clout and financial firepower of hedge funds,' wrote Mr Gross, 'the game has changed in the past few years.' Pimco has about US$240 billion under management. Mr Gross said he has concluded that hedge funds may be shorting bonds of debt-laden companies, anticipating downgrades by credit-rating companies.
'Just as lions cull the weakest and slowest from the zebra herd, hedge fund managers prey on disabled or temporarily injured companies by shorting their bonds,' Mr Gross said. Shorting means selling borrowed securities in hopes of buying them back at a lower price and profiting from the difference.
Hedge funds may be taking advantage of rules that force many managers to sell any bond demoted to junk status, wrote Mr Gross. Bonds of WorldCom, Gap Inc, and Enron traded as if they were junk-rated in days, and sometimes weeks, preceding downgrades.
'The game results in billions of dollars of profits' for hedge funds and threatens companies' survival by hurting their ability to access capital, wrote Mr Gross. - Bloomberg
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