How hedge funds made markets a rollercoaster ride

With dozens of huge share falls in 2017...

SHARE price movements of more than 10pc used to be rare – but this year it seems that large leaps and falls occur almost every day.

Some – such as when Carillion and Provident Financial issued shocking profits warnings – may be warranted. But the market moves of some of Britain’s biggest companies often seem disproportionate to the accompanying news.

On Thursday, construction firm Carillion was one of the Footsie’s top performers of the week, rallying an impressive 46.1pc after rumours that a company in the Middle East was considering a takeover.

But any joy among investors who held Carillion prior to its devastating profit warning in July was likely to be short-lived, with shares remaining down by 72pc for the year even after the significant lift.

And yesterday, Carillion sank a further 20pc after it issued its second profit warning for the year, proving that any caution among investors was well justified.

With 2017 featuring some of the biggest one-day share price drops in the history of UK markets, the pool of big British names struggling to recover from 24 hours of intense losses is continuing to grow. How do you cash in, or even protect yourself?

Andrew Millington, acting head of UK equities at Aberdeen Standard Investments, thinks the huge falls can be put down to the soaring popularity of passive funds, which automatically track a certain market.

If a such a fund tracks the FTSE 100, for example, it can end up indiscriminately investing in an expensive stock just because it is a member of the index.

Millington said automatically investing in companies without actually looking at whether they are good or not can drive them up to unsustainably high prices, only to drive them down in the same way when a problem emerges.

Jason Hollands, managing director at financial adviser Tilney, said the growth in hedge funds can magnify losses, with speculative investors cashing in short positions when a stock falls only to drive it lower.

With an eight-year bull market leaving swathes of Footsie stocks looking incredibly expensive, some nervy investors have become more inclined to sell at the first sign of bad news on fears of a correction.

Indeed, James Sullivan, senior portfolio manager at Coram Asset Management, points out that when stocks are expensive, any risk created by an event like a profit warning is exacerbated as investors fear the worst.

So, aside from getting a crystal ball and selling stocks the day before dramatic falls, what can savers do to minimise the impact if one of their investments is hit by a major sell-off?

Laith Khalaf, senior analyst at Hargreaves Lansdown, says the key is simply to not put all your eggs in one basket. He said: ‘Savers must keep a diversified portfolio of stocks, so if one goes belly up, it isn’t curtains for your savings.

‘If you don’t have the time or inclination to monitor a wide portfolio of stocks, simply buy a few funds run by expert managers who will do this for you.’