“Window dressing” is a term that’s often mentioned on business TV networks but I find that most people don’t know what it means. It’s a simple concept that you can profit from if you are prepared.
On June 30th (this Wednesday), the 2nd quarter of 2010 comes to a close. When a quarter ends it is important for everyone involved in the market; from managers of portfolios and funds to retail traders.
Mutual funds and hedge funds usually send performance reports and a list of their holdings to their clients at the end of each quarter. In order to make these reports as attractive and profitable as possible, the managers of these funds often partake in “window dressing.” This is done in 2 ways -
1. The funds bid up the stocks to higher prices. For example, let’s say that a mutual fund owns 300,000 shares of the company Walter Energy, Inc. (WLT). On June 30th (the last day of this quarter), they buy another 50,000 shares, thus pushing the price of the stock higher. When the market closes for the day, WLT has closed strongly improving the appearance of the fund’s performance before presenting it to their clients.
2. Managers will sell stocks with large losses and purchase stocks that have been high-fliers. Clients want to see that their money is in stocks that have been moving up rather than moving down. However, managers could be in stocks that have been going down for the past couple of months. At the end of this quarter will sell those positions and gets into stocks that have been moving higher. When the quarterly statement is sent to the clients, these new positions are reported as the fund’s holdings.
Though you might not be a mutual/hedge fund manager or one of their clients, window dressing is important for you to pay attention to. The buying and selling of stocks by these funds is what moves the stock market. If window dressing occurs, you will have opportunities to profit by piggy-backing onto the funds’ buying. If you are short positions, you could look to cover part or all of your position, in anticipation window dressing.
The countdown is on; there are only 2 days left until the end of this quarter. Let’s pay attention and be ready to capitalize if window dressing comes into play.
[=D]
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