Hedge fund turmoil

This could be another reason why the market is struggling today. As explained by Christine Williamson at Pensions & Investments, most hedge funds operate on an end-of-quarter deadline for requests from clients to have their money returned. That forces asset managers to liquidate lots of holdings, which pushes down prices.

“We'll see a tidal wave of hedge fund closures before the end of 2008,” said David C. Saunders, founding managing director of K2 Advisors LLC, Stamford, Conn. K2 manages $7.4 billion in hedge funds of funds. Mr. Saunders said smaller firms will be hard-pressed to survive a triple whammy: poor performance that has dropped 90% of funds below their high-water marks, resulting in no performance fee income; large redemption requests that will force portfolio liquidations at fire-sale prices, further dropping performance; and rising costs for everything from utilities to accounting, administrative, information and compliance services.

The pending hedge fund collapse provides another example of how unregulated businesses lacking most any kind of oversight or transparency will eventually create a disaster not only for themselves for the overall economy. From the NY Post:

Some of the industry's smartest investors got hammered over the summer amid nearly unprecedented volatility. Oil went from close to $150 a barrel to below $100 a barrel in a matter of weeks, while stocks were roiled by a series of bank failures. And a formerly winning strategy - shorting stocks - kept getting hampered by new rules from the Securities and Exchange Commission. Then came September, which is shaping up to be the worst month on record, comparable only to a decline of 8.7 percent in August 1998, when Long-Term Capital Management imploded, according to Hedge Fund Research Inc.