The hedge funds got trimmed late yesterday, when many income trusts were hit by an unexpected drop in price as the sector joined the S&P/TSX composite index.
For weeks, Bay Street professional traders have been loading up on trusts, anticipating selling into the demand from passive investors such as index funds late yesterday, when 72 trusts joined the Canadian equity benchmark in a widely advertised shift in index membership. Industry experts estimated the hedge funds held $500-million of trusts heading into yesterday's trading, and projected potential demand from passive investors would run to $1.5-billion.
But in the busiest late-day trading the Toronto Stock Exchange has ever seen, the selling from the pro traders outweighed the demand from the index crowd, who did some of their shopping earlier in the week. So the prices of many trusts dropped sharply in the last few minutes of the session.
For example, new benchmark member Peyto Energy Trust was down 5.1 per cent, and Fort Chicago Energy Partners LP was off 6.9 per cent.
Of the 70 trusts in the S&P/TSX capped trust index, only four saw their prices rise yesterday.
"The run-up you saw in the last two, three days was opportunistic market players, like hedge funds, positioning themselves to be able to sell on to the indexes, who have no choice but to buy as of the close of today," said Gavin Graham, a director of investments at Guardian Group of Funds Ltd. "On Monday, this will all wash out and if you look at it from a whole week's point of view, you will end up at the same place."
The TSX runs what's known as a market-on-close or MOC facility to allow trading in stocks at their closing prices after the closing bell rings at 4 pm. There were 10,912 trades in the MOC yesterday, while the previous record for traffic was set Sept. 16 at 5,437 transactions.
© The Globe and Mail
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