NEW YORK (Dow Jones)--Investors have been a trigger-happy lot this week, gobbling up risky securities one day and dumping them the next.
But while the European debt crisis dominated the conversation in the market, a key factor behind the turmoil was the fact that it's the end of the quarter.
Quarter-end is always a big deal for large, conservative investors like insurance companies and pension funds, which typically face self-imposed limits on their risk-taking and on how much they can hold in different investments. Those rules mean that at quarter-end they place buy or sell orders just to get back in line with their mandates.
After a quarter as volatile as this one, that rebalancing process can be especially extensive. Some investors may have suffered hefty losses in their equity portfolios and gains in their bond holdings. To readjust, they're stocking up on equities to replenish holdings that have lost value. Others might be redirecting cash from their now top-heavy bond funds.
That rebalancing could be sparking the market's up-and-down moves. After dropping over 6% last week, the Dow Jones Industrial Average hasn't ended in the same direction as the previous session since Tuesday.
At the same time, money managers are generally rethinking their strategies, making it even more difficult to decipher market moves. These investors are reducing riskier holdings due to the darkening clouds over the euro zone and the global economy.
"The market is getting very mixed messages [on Europe ], and when you throw in the fact that we're coming to the end of the quarter," that's prompting adjustments, says Adrian Darley , London -based head of European equities for Ignis Asset Management, which manages roughly GBP70 billion .
The third quarter was an especially tricky one for investors needing to rebalance. The DJIA slipped about 10%, while the Brazilian real--a popular bet on global growth--lost nearly 20% of its value against the dollar. By contrast, the dollar rose against most currencies, and Treasury bond prices rallied after the Federal Reserve said it would buy more U.S. debt to lower interest rates and boost the economy.
"We are managing our portfolios defensively in a period of rising volatility, " said Ashish Shah , head of global credit at AllianceBernstein , which manages $ 210 billion in fixed-income investments.
Granted, much of the market turmoil is tied to concerns about Europe's debt crisis.
"Everyone's talking about it," said Nigel Sillis , director of research, fixed income and currencies, at Baring Asset Management in London , which manages $52 billion . "At the beginning of the week, we dialed in our Asian team for strategy, and they started talking about Europe . We said, look, don't talk to us about Europe , we called you to talk about Asia ."
Ignis's Darley says some investors, especially hedge funds, have fairly extreme positions, making topsy-turvy quarter-end trading more likely. Currency investors appear very worried about a euro collapse over the next one to three months, judging from signals in the derivatives markets, notes analyst Chris Turner at Dutch bank ING.
But AllianceBernstein's Shah says much of the recent turbulence is down to big moves in stocks, bonds and emerging-market currencies throwing investors for a loop. Losses on emerging-market bonds and currencies have been particularly acute, requiring adjustments. Because some investors had taken on more risk by betting on currencies as well as bonds--buying local-currency bonds, for example--"that forced deleveraging into the end of the month," Shah says.
Emerging-market bonds saw their biggest weekly outflow on record in the week ending Sept. 28 , according to fund-tracker EPFR Global. With investors worried about the end-game of Europe's debt crisis and fears over U.S. and Chinese growth mounting, investors are likely readjusting and taking less risk.
"You will continue to see more reduction of risk and people waiting for a trend," a currency trader at a bank says.
-By Neil Shah
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