With the throngs of investment bankers and traders taking their annual pilgrimage to the Hamptons, summertime is typically a slow period for Wall Street. I suspect that 2005 will be an exception to the low volume and muted volatility typical for this time of the year.
One reason I’m looking for a heightened trading environment is the fact that most hedge funds haven’t made money so far this year. The biggest part of a hedge fund manager’s compensation is the performance fee. With nothing to show for their efforts this year, hedge funds will likely be working overtime over the next few months to turn the year around. Considering the amount of leverage some of these funds employ, that could translate into a considerable increase in liquidity.
The recent strength in bonds could be another driver of increased activity. There is much confusion over why the long end of the yield curve is so resilient. Some believe that lower yields are the result of a “Goldilocks” economy that is growing at a just-right pace that makes further rate increases unnecessary, while others feel that a pending recession is in the cards. In any event, market strategists will likely spend the next few months placing their bets with the expectation of resolution in the latter part of the year.