Yesterday GT Advanced Technologies (GTAT) declared bankruptcy, sending the stock down more than 90% in one day. It’s likely that 99% of everyone who read this news went on with their day thinking to themselves, “Thank goodness I didn’t own this stock.”
But the 1%, the smartest hedge funds, were getting ready to pull the trigger on one of the oldest and most powerful quantitative trading strategies around: buying a stock the day after it declares bankruptcy, then selling it at the close.
This strategy has been known by almost every hedge fund on the Street, including the billion-dollar-plus hedge fund I worked for back in 2002, when WorldCom filed one of the largest bankruptcies in history. The next day our fund loaded up on WorldCom stock, which was selling for pennies on the dollar, and we made over 120% in one day.
This bankruptcy trade works for two main reasons:
1) Short sellers buy their stock back (or cover immediately after a bankruptcy filing)
2) Distressed traders-hedge funds will buy bankrupt stocks because there is a possibility they can squeeze some money out of them during the bankruptcy process, especially if they own 5% or more (a controlling stake).
This powerful combination of huge buying with virtually little selling (because no one really sells a stock after it has declared bankruptcy and dropped 90%) usually pops the stock more than 100% the day after a company declares bankruptcy.
That is why GT Advanced Technologies is up 150% today on huge volume, and why many hedge fund traders are smiling while the rest of the public is left scratching their heads.
To find out more about what hedge funds are buying and the sophisticated strategies they use to make 100% or more returns go to Billionairesportfolio.com
President of Billionairesportfolio.com