Forced Liquidations

A guy I play basketball with brought up an interesting area of opportunity for personal accounts today – forced hedge fund liquidations of small cap positions.

Broadly speaking, when hedge funds are forced to liquidate, perhaps due to margin calls or investor redemptions triggered by losses, they may do so at fire-sale prices. Thus, one strategy is to look through the 13F (that each hedge fund managing over $100MM is forced to file) which lists the liquidating hedge fund’s positions and take the other side of those trades.

“Fine,” you say, “but hedge fund carcasses are today well-picked over and don’t always result in bargains.” The excellent insight I heard today was that while this is true of the larger positions, sometimes you can find small-cap positions that are so small a) no hedge fund can put capital to work in it and b) few retail investors are savvy enough to do them.

Not only will these positions have a shortage of counterparties, but also the liquidator probably owns so much of the float that the price will move in your favor significantly. Brilliant! Apparently, Steel Partners a few years back was a perfect example of this.


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