Large positions in technology shares among hedge fund managers could pose a threat to the technology rally if the managers decide they want out.
But some industry experts don't expect hedgers to push the sector into a crash, even though they recognize the managers can influence markets.
Hedge fund holdings of technology shares are probably much less than those held by mutual fund managers, but the nimbleness of hedge fund managers and their aggressive nature make them a potential threat to investment markets.
One consultant to hedge fund investors is steering away from managers heavily invested in the technology sector for that reason. Just as hedge fund managers played a role in speeding the bond market decline in 1994, they might get to the exit quickest if technology stocks lose their appeal, said E. Lee Hennessee, associate principal for Weiss, Peck and Greer's Hennessee Hedge Fund Advisory Group, New York.
According to a WPG midyear survey of hedge fund managers, 68% of growth-style hedge fund managers had their highest concentration in technology stocks. Among macrostyle managers, which regularly can move in and out of markets quickly using top-down analysis, 33% had their greatest weighting in technology. Of hedge fund managers looking for special opportunities, 67% had their greatest concentration in technology.
(Conversely, 40% of opportunistic managers who had sold stock short had their highest short position in technology, the survey said).
Ben Fischer, managing director at NFJ Investment Group Inc., Dallas, a value-oriented manager, agreed hedge fund managers could push technology stocks lower if they decide to get out.
But he doesn't expect that to happen: They're not likely to find any other areas as hot as technology, he said.
Louis Navellier, president of Navellier & Associates Inc., Incline Village, Nev., said investors are forced to be in technology stocks - particularly, semiconductor companies - because they're still the best group. He said the key to technology shares isn't how much money people have put into that sector, but how profit margins hold up. If margins do slip, "Wall Street takes them out and shoots them," Mr. Navellier said.
Mr. Fischer expects a less dramatic end to the technology sector's run. He said even though technology shares have outperformed significantly this year, valuations are not outlandish and might just lag the general market for a while, instead of dropping quickly.
Nonetheless, NFJ's concentration in technology is less than 8%, and executives there expect underperformance from that sector.
Mr. Fischer also said unexpected events - not hedge fund selling - are more likely to drive prices to a sharp drop.
Martin D. Sass, president and chief investment officer for M.D. Sass Investors Services Inc., New York, said hedge fund ownership of the technology sector "is not a concern." While acknowledging that hedge fund managers are aggressive and active investors, Mr. Sass said concentration of hedge fund ownership is one factor among many his firm's managers consider in buying a particular stock.
Sass, which manages assets in private partnerships as well as in traditional separate accounts, has a 23% allocation to technology, but not because the firm likes the sector, Mr. Sass said. His firm uses a bottom-up approach that shows some technology stocks are still attractive values.
A bigger concern for the technology market is share prices that are trading on hopes and dreams instead of earnings, and carry price-earnings multiples that are much greater than the market, he said. In fact, Mr. Sass said the firm is considering placing short-sale trades on some of the stocks in the technology sector.
The absolute value of hedge fund technology holdings is small, which decreases the likelihood hedgers will affect the market, noted Chuck Zender, a managing director of The Leuthold Group, Minneapolis, an investment research firm.
A comparison to last year's correction in fixed income isn't applicable, he said. Unlike the fixed-income market - where it's relatively easy to obtain big amounts of leverage - borrowing to buy is harder to come by, further limiting hedge funds' effect on prices, Mr. Zender said.
Likewise, David Tomasetti, who manages a small private investment partnership fund in Natick, Mass., said hedge fund managers couldn't cause any damage to the markets without other participants, particularly mutual fund managers, getting involved.
It is a problem if everyone buys technology stocks and then wants to get out at once, he said.