the greatest depression

Hedge-Fund Trouble on the Horizon

Omar Minaya and Brian Cashman.

While the federal government has been wrestling with bailout negotiations, market-watchers have been wringing their hands over what they anticipate will be the next nail in the coffin of the American economy as we know it: the cashing out of perhaps thousands of hedge funds. It’s already been a record bad year, the markets are chaotic, and since today, the first day of the new quarter, is the last day investors can take their money out before having to wait another 90 days, hedge-fund managers have been readying for a run on the bank. Some of the most successful fund managers around — including Lee S. Ainslie of Maverick, Louis M. Bacon of Moore Capital, and Daniel Loeb of Third Point Management — have already lost big lately, David Einhorn’s Greenlight lost 11.5 percent, and the expectation seems to be that things will get a lot worse.

• “The hedge-fund shakeout over the coming months could be brutal, and have nasty systemic consequences if hundreds or thousands of hedge funds are all trying to unwind their positions at the same time,” Felix Salmon wrote in Portfolio. “If the counterparty dominoes then started to fall, the financial system could end up in much worse shape than anything we’ve seen so far.”

• “The biggest performance dispersion among hedge funds and funds of funds in six years has set the stage for what some predict will be a six-month-long bloodbath,” says Pensions & Investments: “Sources said they expect the body count to total as many as 2,000 hedge funds and 500 hedge funds of funds between now and the end of March.”

• “Given the complexity of the market — the way hedge funds and their holdings so interlace the financial system, this is a potential massive shock,” warned the Financial Times. “The authorities are panicked by runs on the banking system, but they might be blindsided by a far worse run on the shadow banking system — one which is beyond their control.”

And then there was this little tidbit of news, in The Wall Street Journal today: “Investors said the Paulson Advantage Plus fund was one of the best performers so far this year, with a net return of 19.44% for the year to the end of August … One fund generated 589.62% in what is thought to be the largest dollar return in a year from a single hedge fund.”

Hmmm. One of these things is not like the others?

Hedge-Fund Trouble on the Horizon