could get quite bumpy!
Why You'll Feel Hedge Funds' Pain
http://www.thestreet.com/_tsccom/funds/supermodels/10224193.htmlsnip>
From the time of their invention through the mid-1990s, hedge funds were primarily partnerships limited to investments by rich people that focused on profiting from both positive and negative moves in stocks, bonds, currencies and commodities. There are dozens of different types of specialist funds, but the purpose of most is to provide steadfast returns uncorrelated with the trend of the market on which they focus. The funds' members, or limited partners, pay managers up to a third of the profit for annually delivering the holy grail of investing: great results in good times or bad.
In the early part of this decade, amid a raging bear market, a handful of major corporations -- led by General Motors (GM:NYSE - news - research), ironically enough -- grew concerned that their pension funds would never meet their investment goals if they continued to focus strictly on long-only stock-and-bond strategies. So they directed their pension managers to put billions of dollars on behalf of their retired blue-collar workers into "alternative investments," which is a term of art for hedge funds.
Broadly speaking, pension funds try to maintain a balanced allocation of 60% stocks and 40% bonds. The idea of that split is that they'll get more bang for their buck out of stocks -- and yet if equities are soft, returns will be cushioned by nice, safe bond yields. The problem has been that the Federal Reserve's expansive money policy of the past few years created a financial regime in which bond yields were extremely low -- and yet stock returns haven't been too hot, either.
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Fallout -- and Bankruptcy?
Funds are required by contract to provide "liquidity" -- that is, cash -- to members either at the end of a month or a quarter. So, many in the investment community are holding their breath now, waiting to see how many funds need to liquidate stock and bond portfolios in order to meet a flood of redemptions.
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If we see big up days in the market followed by big down days, you can be sure that funds are using every uptick to unload inventory to meet their obligation and avoid bankruptcy.
At times like this, the Federal Reserve and other central banks have learned to flood the system with money to avoid big disruptions. So from now until the end of the month, or quarter, there may be an interesting battle between the private forces of fear and the public forces of balance. Stay tuned: It could be your money.
That would explain the huge repos this week and last:popcorn: