Friday, 24 October 2008

Why are hedge funds not blowing up all over the place?

At Freakonomics Steven D. Levitt asks Why Are Hedge Funds Not Blowing Up All Over the Place? He writes
There are many things I do not understand about the financial crisis, but the one thing that currently puzzles me the most is how there have not been dozens of huge hedge-fund failures over the last few months.
Levitt goes on to give two reasons why we have not yet seen massive hedge-fund failures,
The first is that most hedge funds have “lock up” periods, so that investors can only get their money out with a lag of a few months or maybe up to a year.

The second reason that hedge funds might not yet be blowing up is that they are nearly unregulated, so they don’t face “mark to market” rules or required capital ratios. So these hedge funds could be in terrible shape, but might be able to hide that fact — at least until the redemptions hit.
From this he makes a prediction that,
the next few months will see a string of huge hedge-fund failures, which will lead hedge-fund investors to pull their cash out of hedge funds en masse, triggering further hedge-fund blow ups.
A testable hypothesis. Time will gives us the answer.

2 comments:

PC said...

I know it's said that post-facto predictions by economists are the only accurate one, but isn't Levitt just taking the biscuit?

This from the 'Daily Telegraph' has a lot of people talking:

"Thousands of hedge funds are on the brink of failure as the global economy contracts with unexpected severity, according to the chief executive of GLG, Europe's biggest hedge fund..."

Paul Walker said...

There is also a piece in the New York Times on Investors Flee as Hedge Fund Woes Deepen