To: mishedlo who wrote (40377 ) 11/1/2005 11:21:36 AM From: Incitatus Respond to The hedge fund industry has grown rapidly in recent years, by one estimate going from an estimated $500 Billion in assets under management in 2001 to around $1.3 Trillion today. The rise in popularity of hedge funds is similar to that of technology stocks in the late 1990s and more recently the rise in popularity of real estate investment. In all three areas a speculative bubble formed as the initial success of savvy early investors attracted large numbers of new players into the field. The rush of new capital helped fuel additional success stories and eventually distorted asset prices far beyond reasonable levels. As more investors and creditors piled into certain classes of hedge funds it created great short term gains for most investors involved in the stampede. The hedge fund bubble now seems to have passed its peak. HedgeFundReasearch.com has an index that attempts to measure the returns of the entire global hedge fund universe, as well as many strategy specific indices. According to their records, hedge funds returned an average of 13.39% in 2003 but returns averaged just 2.69% in 2004. As of 10/28/05, the year to date return was -0.97%, with October showing -2.36% on its own. All seven of HFR's main strategy indices were down for the most recent 4-week period, ranging from -0.29% to -3.55%. The decline in returns was predictable, given the state of the industry and the current economic climate. Going forward, average hedge fund performance is likely to get much worse. Profitable strategies have become money loosing strategies, but money continues to pour into hedge funds, masking much of the damage that has already been done while creating the potential for even greater damage. When many types of hedge trades are unwound the funds that are last to exit will take the worst damage. The highly leveraged nature of many hedge funds means that small losses can be rapidly magnified and can force funds to liquidate their positions at a sizable loss. It is hard to predict how much damage will be done as the hedge fund bubble deflates.
