Tech stock valuations at mercy of hedge funds

End-of-year redemptions could keep prices down for public and private tech firms

Hedge funds have been liquidating stock positions of late in order raise cash.

They're going to need that cash in order to pay clients who want out of such funds, most of which have suffered losses and are having their worst year in memory.

The sales have helped push down the tech stocks in the Nasdaq, because hedge funds -- always willing to take risks in their quest for outsize returns -- had been big buyers of small growth stocks in recent years.

How much further these hedge fund sales could push down the valuations of tech companies depends on how proactive the funds have been in getting ready for the end of the year.

Hedge fund clients have limited time windows during which they can withdraw their money. Many firms only allow clients to remove their money on a quarterly basis, or an annual one in some cases.

That means many funds will see clients withdraw their funds on Dec. 31.

Those fund managers who have planned ahead and have already sold won't be forced to sell more shares to raise cash around that date.

One veteran stock trader says he thinks they are in the majority.

"I don't see we'll see a flood of redemption sales during the last two weeks of the year," says Mark Lehmann, head of securities trading and co-president at the San Francisco investment bank JMP Securities.

"Clients have to give notice -- 30, 60, even 90 days -- so most funds have already been positioning themselves in anticipation" of coming redemptions, he says. 

A lot of the hedge funds his trading desk deals with are now on the sidelines, preserving capital through the end of the year, Lehmann told me.

But not all funds have had that luxury. Raising money requires selling winners. Those that made bad bets on housing, or on commodities -- which have plummeted in the last two months --  might be looking at a some stark choices.

They can sell their losers, thereby cutting into the fund's principal asset base. If the losses are big enough, they can bring down the entire fund.

The other choice is to hold on to their positions in hopes of a pre-holiday rally -- what's sometimes called a Santa Claus rally.

If the jolly old man doesn't show, we could see another wave of selling as those hold-out funds are forced to sell whatever they can to raise cash.

If it comes, the selling could combine with forced selling from mutual funds, whose clients don't have to give any notice before they liquidate their positions.

"I think you're going to see continued pressure on tech shares as hedge funds get ready for Dec. 31," says Bob Grady, who overseas venture and growth investments for the giant private equity firm Carlyle Group.

Given that private company shares take their valuation cues from public-company stocks, they could be even more bad news for startup valuations.