Friday, December 12, 2008

Hedge Funds Deleveraging Too

According to Bloomberg, some of the brightest, most successful hedge fund managers got into trouble too.

-In the close-knit hedge fund community, where confessions of a mistake are rare, billionaires Louis Bacon, Kenneth Griffin and Paul Tudor Jones are retreating from borrowed-money bets, private equity and emerging market debt and championing more transparent stocks, bonds and currencies.

Hedge funds got into the same cycle of "everyone's doing it, so we need to to stay competitive." But with massive losses and forced selling due to fund redemptions, Hedge funds now will get back to basics, and this should help to stabilize the market a bit.

I wrote about hedge funds and their potential problems this earlier this year. These funds help create asset bubbles with excess leverage, and they increase market volatility by swapping in and out of stocks and sectors with lightning speed.

-“Managers got away from their core expertise as they got bigger and had to put the money to work,” said Brad Balter, whose Boston-based Balter Capital Management LLC invests in hedge funds. “The industry lost its way, and this is a reset.”

So deleveraging is happening all over. And although its painful, it is absolutely necessary. The same holds true for financial institutions, and in some ways the auto industry. If your model isn't working, a bailout will only prolong the inevitable collapse. The strongest companies are those who can take prudent risks, but avoid falling into the trap of excess leverage.

Full Bloomberg article here.

My August '08 post about hedge funds.

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