In Newest Crisis, Hedge Funds Face Chaos

[DeepModem Mom]

Source: New York Times

LONDON — Hedge funds usually thrive when markets turn volatile. But even these fast-money investors are struggling to cope with the wild swings in the markets, raising concerns that some may not survive. Even before the Bush administration proposed its vast bailout for financial institutions, the hedge funds — those secretive, sometimes volatile investment vehicles for the rich — were on course for their worst year on record. The average fund is down nearly 5 percent so far this year....

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While it is too early to know for sure, interviews with industry experts and investors suggest that few hedge funds had the foresight, dexterity and most of all the courage to counter conventional wisdom and go long on financial stocks last week. On the other side of the equation, various large funds — no names have yet surfaced — appear to have been hit hard by betting against financial stocks. Market participants say it was the frantic covering of the short positions by these funds that propelled stocks up late last week....

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So while many funds may have been hurt badly by the ban on short selling, it is also true that the size of investments and the amount of leverage used have come down markedly in recent months. These steps may well prevent a large-scale implosion, but they are unlikely to stem investor defections as well as a growing notion that the fat times for hedge funds and their investors are coming to an end....

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Accepted wisdom in hedge fund enclaves like Greenwich, Conn., and the Mayfair district of London contends that hedge fund operators benefit from volatility because they can use their wits, flexibility and access to borrowed money to take advantage of sharp market dislocations. But what the last week has shown is that some dislocations are too much for even the best minds in finance to capitalize on....

Read more: http://www.nytimes.com/2008/09/22/business/22hedge.html?ref=todayspaper&pagewanted=all

[CoffeeCat]

1. Just be prepared for the dominoes to...

...continue falling.

It's not going to end.

[On the Road]

2. I am Glad That the Bailout Does Not Cover Hedge Funds

They can afford to fail without affecting the economy too much.

[Xipe Totec]

3. What was AIG, if not a hedge fund for mortgages?

[On the Road]

7. AIG is Clearly an Insurer

The premiums they write are put in a number of investments, some of which were secondary mortgages and similar instruments.

[Xipe Totec]

8. That's a hedge from the point of view of the insurance buyer

A hedge against mortgages going sour.

[TomClash]

4. That's exactly who the bailout helps nt

[On the Road]

6. While It Might Help Them Indirectly

As I understand it, the government will not buy any package of mortgages held by hedge funds or foreign institutions. If the whole sector recovers, that will benefit all funds and companies with a stake in lending.

[UK populist]

5. Paulson wants power to give to whoever and whatever he wants

I think personally that these hedge funds be the largest recipients of any bailouts because they are the ones who probably have the largest positions in the derivative markets and you will never know who gets the money. They are also the ones with the most politically connected people in them I.e. Carlyle group links the Bush family and John Major (former British Prime Minister) James Baker and many others.
These hedge funds are definitely the ones who are in the shit, It is only the fact that they don't have to provide any accounts publicly that you think they aren't the worst. When actually they were the biggest gamblers of all.