The Madoff fraud is the crowning blow. The direct impact is to make sophisticated investors wonder if any of the hedge funds can really be trusted in view of their virtually non-existent third party regulation. The indirect impact is to call into question the capabilities of the due diligence really performed by funds of funds ("FOF's"). With some estimating that approximately one half of hedge fund investing is through FOF's, any tarnishing of the capability of these entities is very problematic.
Couple the hedge fund industry problems with investor independent need for withdrawals to meet investor liquidity problems of their own and you have the recipe for yet another disaster in our financial institutions. Liquidity demands on the funds will necessitate rapid sale of assets, in a market that is not kind to sellers of any kind.
I fully expect that it will get as ugly for the hedge funds as it has been for the investment banks and commercial banks. If not even uglier, as I don't see a political appetite for rescuing these funds.
And, the snowball just keeps picking up speed.
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1 comment:
Hell no, hedge funds should not be bailed out since they are suppose to be for wealthy, sophisticated investors who are diversified. Of course, we are finding out that hedge funds are also a convenient vehicle for fraud, cleaning out ordinary investors and retirees of life savings. Even legitimate funds are losing huge sums of money for their clients, so obviously, hedge fund managers are not so hot investors after all.
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