'If hedge funds are interested, so are we.' This seems to be the new mantra for investors looking for a bit of respite from the volatility in the equity markets over the past few months. Even experienced investors, whether individuals or institutions, have seemed dumbfounded as tried and tested strategies take a dive.
At this point, only one type of market player is calling the shots, and that is hedge funds. They are putting their money into stocks where they see value, and other equity investors are following suit - if the trading volumes in those stocks is anything to go by.
Shares in Barratt Developments soared to lead the UK housebuilding sector higher on Monday after its announcement that a US fund manager had increased its stake to more than 6 per cent. Polaris Capital Management, a Boston-based value manager, had earlier taken a 5.73 per cent stake in Barratt, whose shares have fallen as the housebuilding industry suffers lower sales volumes and deteriorating prices in the wake of the credit crunch.
However, Barratt shares were up nearly 24 per cent in late afternoon trading in London. Polaris says that its investment approach is to identify and buy into companies 'with undervalued streams of sustainable cash flow'.
Earlier this month, Washington Mutual shares jumped after a UK-based hedge fund manager Toscafund Asset Management reported to market regulators it held a 6 per cent stake in the struggling mortgage bank. Other companies have seen similar surges in their share prices after hedge funds showed an interest.
Up to now, hedge funds have generally got it right when buying into companies. Investors will be hoping it stays that way.