Hedge funds are a big shadowy world that has dominated the market. Since stocks have lost $30 trillion in value over the last year, much of that financial horsepower has been from hedge fund selling. But how much? And how much more? The answer to both questions is nobody knows because hedge funds are lightly regulated. But Barton Biggs has some ideas.
Biggs -- who runs a hedge fund -- estimates that the hedge fund industry will sell $250 billion more worth of stocks to meet investors demand for redemptions. He thinks that recently 7,000 hedge funds managed $1.9 trillion. But he guesses that the amount has declined to $1.4 trillion thanks to 25% worth of losses. He guesses that between $350 billion and $420 billion will be withdrawn by the middle of 2009 and that $150 billion has already gone. (He arrives at the $250 billion by subtracting the $150 billion from $420 billion and rounding up.)
Biggs is betting that stocks are bottoming out and that hedge funds will be eager to get back into the market so they can make up their losses and resume making profits which will get them back into a position to earn performance fees. He appears to be investing his money in the notion that all the bad news is already reflected in the market. Since he knows much more than the average person, he could be right. But I wouldn't bet on it.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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