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updated 5/11/2005 7:12:30 AM ET 2005-05-11T11:12:30

Stock indexes slumped Tuesday, as rumors swirled around Wall Street that hedge funds may be facing large losses because of their investments in troubled automaker General Motors. Volatile crude oil prices also weighed on the market.

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Last week, ratings agency Standard and Poor’s downgraded the debt issued by General Motors and Ford to “junk” status. Also, billionaire investor Kirk Kerkorian’s made a significant investment in auto giant GM. The thinking, analysts said, is that several global hedge funds may have suffered losses in the market gyrations the two events created.

“We are hearing some rumors that there could potentially be some hedge funds that are over-invested in General Motors’ bonds,” said Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray in Minneapolis. “That is part of the reason [for today’s sell-off] — nervousness about how it might affect the market.”

Despite the hedge fund furor, GM’s stock stayed afloat, rising 20 cents to $31.53. Hedge funds invest in a wide variety of stocks, bonds and derivatives to maximize returns and are considered riskier than typical stock or mutual fund investments.

The Dow Jones industrial average was down 103.23 points, or 1 percent, at the close of trading, while the broader Standard & Poor’s 500-stock index lost 12.62 points, or 1.1 percent. The Nasdaq composite index dropped 16.90 points, or 0.9 percent.

Crude prices were volatile amid speculation that supplies will be tight late in the year, confounding brokers who believe prices should be falling given that crude inventories are steadily rising. After rising as high as $53.10, light sweet crude for June delivery settled 4 cents higher at $52.07 a barrel on the New York Mercantile Exchange.

A recent rise in crude oil prices prompted Delta Air Lines Inc. to warn of possible bankruptcy, leading many investors to wonder whether other companies may fall victim to high energy costs, and added to Wall Street’s now-chronic concerns that high oil prices may lead to an economic slowdown, inflation, or a worst-case combination of both.

“A lot of this downturn today coincided with Delta’s announcement and the fact that crude was above $52 per barrel,” said Brian Williamson, an equity trader at The Boston Company Asset Management. “That’s got to make you concerned about who is next as far as companies go and whether this will really hit consumer spending.”

Delta tumbled 10 percent, or 33 cents, to $2.97, after the airline warned that it will record substantial losses for the rest of the year , due in great part to high jet fuel prices. It said it may need to file for bankruptcy if its cash reserves fall too low or creditors call in the airline’s debts.

In the financial sector, Morgan Stanley fell $1.33 to $49.42 as Chief Executive Phil Purcell told an investor conference the Discover card spin-off would hurt revenues, and that the second quarter was shaping up to be difficult. Morgan Stanley executives also said more employee departures could be forthcoming, but that the company had a deep pool of talent.

Cisco Systems 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 8 cents to $18.29 in after-hours electronic trading.

The Wall Street Journal reported that the problems plaguing insurer and Dow component American International Group Inc. may have involved more people than just the two recently departed executives, including former Chairman Maurice “Hank” Greenberg. AIG lost $1.31 to $53.27 on the news.

Supermarket operator Great Atlantic & Pacific Tea Co. Inc. 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.

Overseas, Japan’s Nikkei 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.


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