Friday, October 17, 2008

Chronicles Of Depression 2.0: #348: Hedges

The Hedge Fund Apocalypse
Billionaire investor Warren Buffett wants his fellow Americans to buy stocks, but the Greenwich, Conn., set couldn't take his advice if they wanted to. As investors scream for their money back, hedge fund managers are as paralyzed as the rest of Wall Street.

Hedge fund assets shrank by $210 billion in the third quarter, hit by volatility, higher borrowing costs and $31 billion in redemptions after a wave of investor panic.

The carnage is the worst in the industry's history, surpassing the jolts in 1998, 2002 and 2005, according to Chicago's Hedge Fund Research, which has tracked fund assets and performance since 1990. Funds are scrambling to meet the withdrawal requests, helping to push the major stock averages down in the last few days, and many won't be able to continue in business.

So far this year, 350 funds have closed shop, but that doesn't count the third quarter, when most of the bloodletting has taken place. Ken Heinz, the president of Hedge Fund Research, says he wouldn't be surprised to see 1100 funds liquidate this year.

That would be three times greater than in 1998, when $4 billion Long-Term Capital Management had to be rescued. "We've never seen it happen in this magnitude," Heinz said.

This all begs the question: Where will all that money go?

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