If you recall, I have been warning for a while now that hedge funds were going to take a beating. There are many progosticators out there including Nouriel Roubini which feel that many hedgie bankruptcies are on the way. Below is a snippet of a well-written article from the UK site “Money Week” which I believe spells out why this panic today is probably hedge fund-related.
To my mind, the impact this will have should be further evidence that greater regulation is warranted in the future.
Hedge funds are in forced sale mode
Stock markets may be in fire-sale territory (even longer-term bears such as Jeremy Grantham believe stocks are now closer to being undervalued) but a lot of the big sellers are the hedge fund managers. They bought stocks with borrowed money, and are now having to offload them. While we can’t yet know exactly what’s being sold, we do know there’s plenty more stock still in the pipeline.
The hedge fund industry has been staggering through its worst time in two decades, with an average loss of 17% this year. That beats the performance of most global stock markets, but it’s still not exactly great for a concept that was supposed to be able to sidestep declining markets (though to be fair, ‘short-selling’ bans haven’t helped recently).
Now the heat is really being turned up. Some 8,000 hedge funds with more than $1.7 trn (£1.1 trn) in assets are “being caught in a vicious cycle” say BusinessWeek’s Matthey Goldstein and David Henry, “as worried investors pull out their money”.
The problem lies in the mix of plunging markets and massive deleveraging, i.e. paying down debt, across the financial system. Over the three months to September, another $179bn was wiped off the value of hedge fund assets by falling asset prices, according to Hedge Fund Research. Spooked by the market falls, and keen to have ready cash at hand, investors have been pulling their money out at a rapid rate, with almost $31bn being withdrawn over the quarter – which means hedgies need to sell more assets to repay clients.
Please read the rest of the article at the source link below because it highlights how future redemptions are expected to increase — and, with it, forced selling.
Hedge funds collapsing
The dollar rally spells trouble for some investors
Quote of the day: 10 Aug 2008 – trickier than LTCM
Corporate defaults mean more hedge fund blow-ups
How the hedge fund squeeze will push stocks even lower – Money Week