She says, “You can’t repeat the past.” I say, “You
can’t? What do you mean, you can’t? Of course you can.” — Bob
Dylan, Summer Days
Summer days, and summer nights are indeed long gone for the hedge
fund business. If you believe the experts, hedge funds still
outperformed the S&P 500 (article here),
but this is a dubious claim, as the S&P was in negative
territory, cumulatively, for all of January. New light is being shed
on this secret world, and we’re beginning to see some serious cracks.
Of particular concern is the unwinding of the Sailfish hedge fund.
Markets move in circles, and cycles, and Sailfish looks to be the
headwind on a possible catastrophic unraveling of money that we’ve
not seen in our life times. If the numbers are correct, these funds
have 1.9 trillion dollars of money for use at their discretion. My
question is, what happens when redemptions are called, and these
funds are required, like Sailfish, to liquidate their portfolio to
cover an event that they know is going to occur?
I believe that market cycles, in a stable environment would be
able to absorb these losses, and move forward with some affect to the
overall economy. But with the meltdown in sub-prime, and the lack of
access to credit, we could be seeing a weird culmination of fear and
greed that would make 1987 look like a Sunday in the Park With
George. If more funds must liquidate their positions, this will drive
the market into a vortex of panic that will cause already sizable
losses, to become even larger.
On the note of sub-prime. Anyone who has any dog in this fight
should pick up Irwin Shaw’s short story, “Second Mortgage.”
It’s a quick read, and a worthwhile read. Shaw, was a product of the
great depression, and this story is eerily similar to what we’ve seen
in the sub-prime market.