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Hedge Funds and the Global Financial Crisis


Poor performance helped ignite panic.

At some point even some of the most rugged men in history are worn out and that's where the market is taking a lot of people that understand valuations and history.

This decline is historic in proportions. As a result investors continue to sell or stay away from the action. It is a bombardment that simply doesn't let up. Anyone would be forgiven for feeling like those old school boxers like Jack Johnson: Back in those days fighters would routinely go at it for many rounds (his championship fight with Jess Willard was scheduled for 45 rounds) in scorching hot sun in outdoor arenas. This market has been under scorching hot pressure and portfolios are begging for the kind of mercy afforded current day prizefighters.

We've seen what happens when a group of people have had all their hopes and willpower stripped away. Even armed with knowledge of history, investors are sitting ducks, their will knocked out like an old school fighter laid out on the canvass in the sweltering sun. I'm not talking TKO, but the sort of punishment that can erase memories of good times and permanently shatter confidence. Once the will has been sucked out of a person like I'm not sure it can regenerate.

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I began to feel awkward about the rescue package last week and some of those uneasy feelings seem to be coming to fruition. The idea that the plan was a cure-all or silver bullet and the way it was promoted and the politics involved: The ultimate fact that there wasn't enough honesty, as it's going to take a lot more than $700.0 billion dollars and I think people inherently knew that. The deal is open-ended and open to interpretation.

Main Street and Wall Street feel the same, however: It's not going to work. Ironically, both believe its going to take more money to get to the root of the problem. Right now, I'm not so sure.

I think we are in full panic mode. This is a crisis of confidence. In my opinion, people don't have any faith in their country or the world. There is no way anyone could tell me there is confidence in our leaders. The crazy thing now is that the only solution may be to use the same playbook that got us here in the first place: cheap money and spreading loans indiscriminately to everyone.

Now, how's that for irony?

Of course, the more the market crumbles the more it makes sense we should have just bitten the bullet. I thought at the time that if the rescue plan wasn't passed last week the Dow would be down possibly 1,000 points this week. So now I have to wonder if it would've only been 1,000 points: if so then that would have been fantastic.

I'm writing out of a combination of frustration, anger and disappointment, but not fear. I know at some point the market will rebound. I know stocks are extremely oversold (and I'll add the caveat that of course it doesn't mean stocks can't go lower): That part doesn't scare me. In a way it's better that it happens this way. I continue to say that if there is a date with a certain spot on the downside, a bottom, and then let's get there sooner rather than later.

While I think all segments of society bear responsibility for a nation gone wild, living high on the hog, there is one group that gets special recognition for this week's massacre: hedge funds, which are being slammed. In the first half of the year 350 liquidated, a pace when extrapolated for the full year would see an increase of 24% year-over-year.

I believe it's going to become substantially more. This is also "creative destruction" because there were too many hedge funds using the same old unimaginative strategies that thought the more complicated the approach the larger the returns. These guys fought for the same pool of money and where these funds used to be judged on year to year performance than quarter-to-quarter, most recently they have been assessed by performance every 30 days.
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No positions in stocks mentioned.
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