Update: View From the Street: A Day in the Life of a Hedge Fund Manager

(Updated from 3:25 p.m. EDT)

Day's over. It was a hard day to make money. Our hedge fund manager finished flat overall, which makes him feel pretty good on a down day. (He's up about 25% this year.)

But he doesn't make too much of his success on the short side. "All it did was buy me some more time on my longs." His only long to end up was Comcast (CMCSK).

He covered his short position in American Express (AXP) too soon, it turned out; the stock ended the day down 1. If he had waited, he could have made a bit of money. "I just lacked conviction trying to scalp a strong company in a strong group [the financials] in a declining-interest-rate environment," he says.

Today's declines in the Nasdaq Composite and the S&P , he thinks, bode ill for a further decline in the Nasdaq. He notes a ton of intraday reversals in tech names. For instance, SDL (SDLI) was early on up 5 before closing down 8 19/32 at 354 17/32.

"Short-term, this is bad for the market," he says. "I think the August/September selloff has begun." He's looking for a possible retest of 3100 on the Nasdaq. He did not cover his $500,000 short position in the QQQ -- the Nasdaq 100 (QQQ) index tracking shares -- that he put on at 92 1/2.

Why doesn't he get even more short?

"I think I will, but not yet," he replies. "I don't have a good feel for the timing on this. You could get short and be squeezed by a rally. Today ended on a down note but not a puke." He wants to avoid being overly aggressive here on the short side, which makes sense given that he's up a fair amount this year.

Looking back to June, he says, "I could have been more long in June. I was too cautious. But now is not the time to pile on the long side. The way the market is -- a trading market -- you could easily have a puke here."

Four o'clock on the button the market closes, and on comes the radio playing mellow pop music via the Internet. No need to think about the market now. He ends the day watching a video clip of the Grateful Dead performing Touch of Grey. "I will survive," sings Jerry Garcia.

Not a bad motto for today's investor.

3:25 p.m.: Covering Some Shorts as the Nasdaq Cracks

The market -- by which our hedgie means the Nasdaq -- is cracking a bit midafternoon.

Luckily, his short position in Comverse Technology (CMVT) has worked better than he expected. In part, that's because of the announcement yesterday that Phone.com (PHCM) and Software.com (SWCM) are merging. The combined entity is being viewed by some people -- not necessarily this guy -- as a competitive threat to Comverse in the wireless messaging business.

Comverse slips to 78 7/8. He asks himself, "Should I cover?" He sees today's weakness as a sign that the Nasdaq in general is going down in the next few weeks. He says he would love to buy Juniper Networks (JNPR), SDL (SDLI), Corning (GLW) and Avanex (AVNX) among the optical equipment companies. But not now, because he sees the Nasdaq going lower here.

Comverse continues to track lower. It hits 77 3/4. Then 76 3/4. His wife calls and they talk about buying a new coffee table. He says, "Let's do it." He's hoping the Comverse trade works out.

He gets a call from a market maker in Comverse and covers a third of the position at 75 7/8. Now he's less edgy as he has booked some of the paper profit.

Meanwhile, Applied Materials (AMAT) continues to sink. It had been down 1/2 until about midday, when it slid to 69, down 2 5/8. His take on the stock and on the rest of the semiconductors? They are all breaking down -- AMAT broken below its 200-day moving average -- and no go-go guy will buy any stock with price action like that.

"That's rule No. 1," he says. "All the semis are down. Intel (INTC), Texas Instruments (TXN) and AMD (AMD)."

Does he think this semiconductor cycle is over? He has no opinion. "It doesn't matter what I think," he says. "It matters what 'they' think." Who is they? He means the West Coast aggressive growth guys like Larry Bowman.

Comverse hits 74 3/8. He covers more. It hits 72 5/16. He covers almost all of his position in Comverse. He makes about $60,000 on the day.

Meanwhile, he unwinds his part of his short position on the Nasdaq 100 (QQQ) for a slight gain.

CNBC is turned off by 2 o'clock, and the Yankees-Oakland A's game comes on. Maria Bartiromo has been replaced by Jose Canseco.

Our hedgie is worried about a short position he has in American Express (AXP). He has no conviction. He was simply betting that the financials' good run of late was due to end. When the stock doesn't go down much by midafternoon, he bails with a small loss.

At 2:08, word comes in that Chase Hambrecht & Quist's analyst is defending Comverse. The stock makes a U-turn up. He laughs as he says, "Maybe I should go long?"

12:42 p.m.: Happily Watching Comverse and the QQQ Drop

At midsession, our hedgie is watching short positions in the QQQ -- the Nasdaq 100 (QQQ) index tracking shares -- and in Comverse Technology (CMVT), a wireless software company. Otherwise, he is bemoaning a directionless market that is not taking his longs up. (He is 85% long, 15% short.)

His QQQ short is working fine. He put the position on at 92 1/2 and looks to cover at 89. It's one of his "long-term" positions; he's had the short on for five days.

His Comverse short is also going well as that stock drops below 80 after hitting an intraday high of 84 5/16 at the opening when Lehman Brothers and Morgan Stanley Dean Witter touted the stock. He has a $500,000 bet on. Yesterday, Comverse dropped 9 points on heavy volume. It's in the red again, down 2 bucks and change.

He's feeling good about the short now. Earlier, however, when the stock was near 84, he considered covering half his position to avoid losing all his profits if the stock went to 87.

A Hedgie's Successful Short Comverse Technology vs. Nasdaq Composite Index, five days

Now, with the stock below 80, he is feeling a lot more confident about his position. "Last year when Lehman would reiterate a buy on Comverse, the stock would have exploded up," he says. "Not today. I think I am right on this one. The stock traded a lot of volume yesterday."

He is watching the offer side more than the bid side. Why? "There is a lot of this for sale. The sellers are leading the way in this," he says.

He notes that today the stock is down on volume that is about 140% heavier than in recent days.

"The stock is breaking below its 200-day moving average," he says. "The go-go guys who used to love this stock are not going to come in and buy with this kind of action. In the 'mo' [momentum] space, when a stock goes down, it's like a punch in the stomach for the go-go guys. They puke the stock. I am looking for a puke."

The next price level he looks to is 77 3/4, the recent bottom in the stock.

10:39 a.m.: Skeptical on Lilly and AMAT

Here is how the stock market looks today from the offices of a hedge fund located 37 floors above Park Avenue in Manhattan.

This firm runs a $150 million hedge fund and another $200 million of separate accounts. The offices are standard-issue trading room stuff -- a long line of flat-paneled screens, a half-dozen 30-somethings bent intensely over those screens and almost everyone on the phone.

The hedge fund manager we are with today is expecting a down day. He listened in on the morning call of a major Wall Street house before the opening. The analysts on the call were touting Eli Lilly(LLY), Applied Materials(AMAT) and were generally talking up tech.

This guy wasn't buying.

He thinks Lilly and drugs in general are dead money for the near term. (They may get a bounce today, though, he thinks.)

His bearish logic? Prozac generated nearly 20% of Lilly's revenues and it is going generic two years sooner than expected. Investors have been overweight the stock and drugs in general. In a strong rally, people will sell.

"The big story today is Lilly," he says. "For two reasons: portfolio managers have made a lot of money in this stock. How are they going to react today now that they have given up so much? Lilly has gone from a high of 124 to 76. That is a body-blow. Will they take their money out of the drug sector or will they start selling other stocks in their portfolio to buy into Lilly or the drugs?"

On Applied Materials, he says, "my takeaway from that morning call I listened in on -- the company's guidance to the analysts about future earnings was not that positive. In the momentum game, guidance is everything. That suggests to me that there is some concern between the lines about sequential earnings growth ahead. The semiconductor and equip stocks have been in a correction for awhile now, and I don't see that changing. AMAT could rally a bit here because the company did not blow up, but I see no big up move."

He says that Applied Materials will get a lot of support from the big Wall Street houses today. The word is, that Morgan Stanley Dean Witter is defending the stock. Morgan Stanley also upped its buy recommendation of Lilly.

What does our man like here? He is long two cable television stocks -- Comcast(CMCSK) and Charter Communications(CHTR). He also likes Enron(ENE) as a fiber-optic buildout play.

His favorite stock: Global Crossing(GBLX). He acknowledges that the stock is very volatile. So he trades it -- typically buying at the 25 level and selling above 30. Longer term, he sees Global Crossing being taken over by another telecom giant looking for additional high-speed data capacity.

Where does he see the Nasdaq Composite Index going in the next 60 to 90 days? Lower, as investors become concerned about the possibility of economic recession. And then? Stay tuned for our next note from the front. ...

>To order reprints of this article, click here: Reprints