Stocks Plummet on Hedge Fund Rumors

Stocks plummeted to end lower Tuesday after investors withdrew amid rumors that several hedge funds building up stakes in GM's debt are at risk.

The Dow Jones industrial average (search) tumbled 103.23 points, or 0.99 percent, to end at 10,281.11. The technology-laced Nasdaq Composite Index (search) ended lower 16.90 points, or 0.85 percent, at 1,962.77 while the broader Standard & Poor's 500 index (search) lost 12.62 points, or 1.07 percent, to close at 1,166.22.

All three major indexes started the day lower amid higher oil prices and a dearth of economic news. However, stocks began to tumble in the afternoon as rumors of hedge fund losses bounced off traders. Traders were hearing several global hedge funds had suffered losses in the credit market related to positions taken in auto companies following the significant investment in General Motors Corp. (GM) by billionaire investor Kirk Kerkorian's Tracinda Corp. (search)

Hedge funds — which invest in a wide variety of stocks, bonds and derivatives to maximize returns and are considered riskier than typical stock or mutual fund investments — were said to have been hit hard following the debt downgrades, which eroded the value of GM's bonds, and the significant investment in GM by Kerkorian.

Despite the quiet furor over the possible losses of hedge funds, GM's stock stayed afloat, rising 20 cents to $31.53. GM's stock was one of only two of the 30 blue-chip Dow stocks that finished the session higher. The other was Boeing Co. (BA), which gained 0.8 percent, or 48 cents, to $61.04 after completing contracts with Japan Airlines Monday for 30 Boeing 787 Dreamliner and 30 737-800 passenger airplanes, worth $5.3 billion at list prices.

"Obviously GM's stock got a boost last week on the Tracinda offer, then the bonds got crushed by downgrades by Moody's, so they would've gotten hurt on both sides of that trade," said Todd Clark, head of listed equity trading at Wells Fargo Securities. "Against the backdrop of crude trading higher ... it's a little unsettling."

The hedge fund rumors affected banking stocks adversely. The U.S.-listed stock of Deutsche Bank (DB) slid 3.3 percent to $79.58 after speculation about investment banking losses, possibly in connection with a hedge fund.

Shares of U.S. banking companies fell, with J.P. Morgan Chase & Co. (JPM) down 2.3 percent, or 82 cents, at $35.14 and Citigroup Inc. (C) down 1 percent, or 47 cents, at $46.38. Both are Dow components, and J.P. Morgan ranked among the Dow's three biggest percentage decliners.

Also giving investors the jitters were oil prices, which were higher on concern over rising global demand. In addition, saboteurs attacked a crude oil pipeline complex in northern Iraq, according to the Iraqi Oil Ministry.

After rising as high as $53.10, a barrel of light crude for June delivery settled at $52.07, up 4 cents, on the New York Mercantile Exchange. While well off their $58-per-barrel highs, the consistently high prices for oil have exacerbated Wall Street's worries about the economy.

In corporate news, Morgan Stanley (MWD) fell $1.33 to $49.42 after Chief Executive Phil Purcell (search) told an investor conference the Discover card spinoff would impact revenues at Morgan Stanley, and that the second quarter was shaping up to be difficult. Company executives also said more employee departures could be forthcoming, but that the company had a deep pool of talent.

Investors were also keeping an eye on American International Group Inc. (AIG), the insurer under investigation by the U.S. Securities and Exchange Commission (search) and New York state authorities. Those involved in accounting probes believe knowledge of, and participation in, questionable adjustments extend beyond two of AIG's former senior executives, The Wall Street Journal reported. AIG lost $1.31 to $53.27 on the news.

Delta Air Lines Inc. (DAL) plunged after it said it expects a "substantial" loss for the remainder of the year, while Inc. (PCLN) fell sharply after the online travel service missed analysts' revenue estimates late on Monday. Delta's shares fell 10 percent, or 33 cents, to $2.97. shares dived 10 percent, or $2.70, to $23.94.

Supermarket operator Great Atlantic & Pacific Tea Co. Inc. (GAP) said it would undergo a major restructuring, including dropping its operations in Ohio and Michigan and the possible sale of a Canadian division. The company's shares surged 23.4 percent, or $4.28, to $22.43.

Cisco Systems (CSCO) was unchanged at $18.21 ahead of its earnings report, which was released after the close. Cisco beat Wall Street earnings forecasts by a penny per share and had strong revenue growth. The stock added 16 cents to $18.37 in after-hours electronic trading.

The turmoil in the stock market prompted some investors to flee to the relative safety of U.S. government debt. The benchmark 10-year U.S. Treasury note jumped 18/32 to a price of 98-9/32, while its yield fell to 4.216 percent from 4.288 percent, a two-week high, late on Monday.

The bond market rallied as stocks dropped, with the yield on the 10-year Treasury note skidding to 4.21 percent, down from 4.28 percent late Monday. The dollar was mostly lower against other major currencies, while gold prices rose.

Trading in stocks was active, with 1.47 billion shares changing hands on the New York Stock Exchange, just above the 1.46 billion daily average for last year. About 1.63 billion shares were traded on Nasdaq, below the 1.81 billion daily average last year.

Declining stocks outnumbered advancers on the New York Stock Exchange and Nasdaq by roughly 2 to 1.

The Russell 2000 index of smaller companies was down 7.87, or 1.31 percent, at 595.04.

Overseas, Japan's Nikkei stock average fell 0.11 percent. In Europe, Britain's FTSE 100 was down 0.36 percent, Germany's DAX index dropped 0.96 percent, and France's CAC-40 lost 0.50 percent.

Reuters and The Associated Press contributed to this report.