At First, John Paulson Was in a Wolf Pack of One ...

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Photo: Everett Bogue; Photos: Getty Images, istockphoto

Yay, hedge funds are making money again! They were up 5 percent last month, according to the Times, buoyed by monster gains from Steve Cohen's SAC Capital, Ken Griffin's Citadel, and our friend John Paulson.This pleases us, because a world in which hedge funds don't make money is a world we don't understand.

But why it this happening?

One research expert tells the Times it's because "risk appetite has quickly returned over the last eight weeks," but that seems a little simplistic. David Rosenberg, a former Merrill Lynch economist now with Gluskin Sheff, offered an alternate explanation in a research note this morning: Everybody is in the same trades. In other words, the hedge funds are running in a pack, which is how they make the most money. Because inevitably the rest of the market — mutual funds, day traders, grandma's investing club — starts chasing after them, which causes rally.

So can it last? According to Rosenberg:

"I believe there is a lack of appreciation from what history tells us about the aftershocks that occur after a cycle that was dominated by a credit collapse and asset deflation, as opposed to a garden-variety inventory-led recession. In five words: economic fragility, lingering deflation pressure."


So, in one word: No.

Hedge Funds Rebound, Gaining 5% in a Month [NYT]
Market's Latest Run Appears Poised for Reversal [Seeking Alpha]