The Coming Collapse: Hedge Fund House of Cards
by J. Christoph Amberger
Downturns in stock markets may hit the average investor quite hard -- especially when you're still (or again) in the habit of checking your portfolio daily with an eye on bankable and spendable short-term gains.
But dips, corrections and crashes also remind the professionals, such as fund managers, that it may have been the market pushing up the valuations of their funds and portfolios, not necessarily their genius or $200,000 graduate degree.
The Goldman Sachs Group Global Alpha hedge fund, for example, lost almost a quarter of its value in August, its biggest monthly decline, on losses from currency and stock trades. Since a March 2006 high, the fund has fallen 44%.
Nothing succeeds like success. And nothing makes people run as fast as lack of success. Accordingly, investors notified Goldman that they plan to withdraw $1.6 billion -- a fifth of the fund's assets.
It's partly a knee-jerk reaction. And partly cold, clear math: If you've lost half of your investment, what are the chances for the remaining principal to double to break even… after fees?
It doesn't matter if the fund in question did indeed return 20% or even 40% the previous year. The only thing that matters in a bull market is the past quarter... or at best, the current year.
If too many investors show up at a fund's or hedge fund's doorstep asking for their remaining capital to be returned, the fund has little choice but to start liquidating assets, which releases further supplies of stocks or commodities into a market that is already seeing the value of these assets fall.
As long as the quantities are contained and it is the performance of individual funds that is at issue, the market can usually absorb the influx; not so when a whole category gets hit and considerable backlogs of assets are released into the market.
An interesting observation you could make about this subprime-initiated dress rehearsal of the big, post-Olympic crash of 2008 or 2009 is that key commodities, by and large, have followed the ups and downs of the markets.
Part of this because at the core of subprime market volatility is the fear that the American consumer will be less able to consume. And American consumption is what the world economy depends on to run smoothly. That includes Chinese companies who produce the goods shipped wholesale to the States. And it affects the suppliers of commodities and raw materials processed by those companies. Because the equation has become quite simple: If credit gets tight for the American consumer, demand will fall for Chinese-made products and shares, and so will demand for anything ranging from copper wire to oil to gold. Tough if you're one of six U.S. ETFs sitting on a combined 600 tons of gold that you hoarded expecting prices to go up infinitely... not least because you managed to idle a sizable chunk of supply.
For the near term, however, hedge funds and ETFs investing in either China or speculative commodities such as gold, cobalt or oil have little to fear.
Downturns in stock markets may hit the average investor quite hard -- especially when you're still (or again) in the habit of checking your portfolio daily with an eye on bankable and spendable short-term gains.
But dips, corrections and crashes also remind the professionals, such as fund managers, that it may have been the market pushing up the valuations of their funds and portfolios, not necessarily their genius or $200,000 graduate degree.
The Goldman Sachs Group Global Alpha hedge fund, for example, lost almost a quarter of its value in August, its biggest monthly decline, on losses from currency and stock trades. Since a March 2006 high, the fund has fallen 44%.
Nothing succeeds like success. And nothing makes people run as fast as lack of success. Accordingly, investors notified Goldman that they plan to withdraw $1.6 billion -- a fifth of the fund's assets.
It's partly a knee-jerk reaction. And partly cold, clear math: If you've lost half of your investment, what are the chances for the remaining principal to double to break even… after fees?
It doesn't matter if the fund in question did indeed return 20% or even 40% the previous year. The only thing that matters in a bull market is the past quarter... or at best, the current year.
If too many investors show up at a fund's or hedge fund's doorstep asking for their remaining capital to be returned, the fund has little choice but to start liquidating assets, which releases further supplies of stocks or commodities into a market that is already seeing the value of these assets fall.
As long as the quantities are contained and it is the performance of individual funds that is at issue, the market can usually absorb the influx; not so when a whole category gets hit and considerable backlogs of assets are released into the market.
An interesting observation you could make about this subprime-initiated dress rehearsal of the big, post-Olympic crash of 2008 or 2009 is that key commodities, by and large, have followed the ups and downs of the markets.
Part of this because at the core of subprime market volatility is the fear that the American consumer will be less able to consume. And American consumption is what the world economy depends on to run smoothly. That includes Chinese companies who produce the goods shipped wholesale to the States. And it affects the suppliers of commodities and raw materials processed by those companies. Because the equation has become quite simple: If credit gets tight for the American consumer, demand will fall for Chinese-made products and shares, and so will demand for anything ranging from copper wire to oil to gold. Tough if you're one of six U.S. ETFs sitting on a combined 600 tons of gold that you hoarded expecting prices to go up infinitely... not least because you managed to idle a sizable chunk of supply.
For the near term, however, hedge funds and ETFs investing in either China or speculative commodities such as gold, cobalt or oil have little to fear.
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