On the Q3 earnings conference call for Fortress Investment Group LLC (NYSE: FIG) -- a top alternative investment firm -- there was an interesting discussion of the recent volatility in the financial markets. For example, between 2003 to 2007, the S&P 500 only had two days where the markets moved 4% in a day. However, in October of this year, there were 20 of 23 days where the S&P had intraday moves of greater than 4% (one day had a 10% move).

As a result, it's no surprise that the Q3 results for Fortress were lackluster. The firm reported a loss of $20 million, or $0.04 per share, which compares to a profit of $111 million, or $0.26 per share in the same period a year ago.

In fact, Fortress hedge funds have been hemorrhaging. That is, investors have requested $4.5 billion in redemptions, which accounts for about a quarter of assets. Unfortunately, it looks like there will be more redemptions over the next couple quarters.

As for the private equity funds, things are much better. After all, there are long-term lock-ups on such vehicles. No doubt, these assets will be a rich source of ongoing management fees. And, when markets come back, there are likely to be incentive fees.

In light of the wrenching markets, it's likely to be a long slog. And this is not comforting for investors. Keep in mind that Fortress carries $675 million in debt, which could be in jeopardy of a covenant violation -- because of deteriorating cash flows.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

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 He guesses that between $350 billion and $420 billion will be withdrawn by the middle of 2009 and that $150 billion has already gone.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.

It's a pattern that's been all too familiar in the oil market these past few months: the price of oil moves slightly higher, but then can't sustain its increase and the rally fails, usually with oil closing lower at the end of the day.

What's causing it? Energy traders and economists will tell you that the price decline is being driven by slowing oil demand growth in emerging markets, combined with real, year-over-year demand reduction in the world's biggest market, the United States.

Investors exit oil

But that's not the whole story behind oil's stunning drop from $147 to the $60-per-barrel-range, so says Energy Trader Jim Dietz. Dietz who argues that the global reduction in the availability of leverage -- money borrowed for use in trading -- has taken a considerable amount of the buying pressure out of oil, as well as other commodities.

"We clearly are not seeing as many hedge funds and investment funds establishing positions in oil, and the ones who are in the market are establishing smaller positions," Dietz said. "As a result we rarely see any more powerful moves to the upside with powerful momentum characteristics. I'm not saying hedge fund buying is the only reason oil hit $147 this summer, but they certainly played an important role."

Congress will bring in a bunch of big hedge fund managers like George Soros and ask them why they make so much money. It will also try to figure out if they control too much of the trading on Wall Street and borrow too much money from banks putting them at risk if the hedge funds default.

According to The Wall Street Journal, "Already, momentum is building to monitor hedge-fund activities more closely and curtail some trading activities, through greater regulatory oversight and lower borrowing limits, industry insiders said."

The government may be going a little too far here. For starters, hedge funds are private institutions with the exception of a couple which have gone public. To a large extent what they pay their traders is based on a formula which their customers accept. These fees are not forced on anyone. It is not an odd analogy to say that a farmer who makes $100 million because he owns 50,000 acres of corn has reaped what he deserves for his labor. But, he is not going to be in front of Congress testifying about what he made. Free enterprise has given him his reward.

On the issue of whether hedge funds borrow too much money and then put it as risk by making aggressive trades, that can be regulated from the side of the banks. If the government thinks banks take too many risks in lending, it can curtail that through actions by the FDIC or the Fed.

The great majority of hedge funds make their profits fair and square. Regulating risk in private enterprise takes the incentives out of making money for hedge fund clients. And, that damages the economy's ability to create wealth, and through that, demand for goods and services.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Greenlight Reinsurance Ltd. (NASDAQ: GLRE) is an off-shore specialty property and casualty reinsurance company. This week, the company reported its Q3 results, which showed a net loss of $118.4 million or $3.29 per share.

Something else: Greenlight's investment portfolio is managed by a top hedge fund manager, David Einhorn. He was the person who publicly criticized -- and shorted -- Lehman before it went bust.

So, it's interesting to listen to the Greenlight conference call to get a sense of Einhorn's strategy.

Now, like many other hedge fund managers, he wasn't able to avoid the storm. In fact, Greenlight's investment portfolio plunged 15.9% for the quarter.

Actually, he increased his overall short positions during the past couple months. Yet, it wasn't enough as the markets underwent extreme volatility. It also didn't help that the federal government banned short selling of about one thousand financial services companies.

So far this year, Blue Mountain's Credit Alternative hedge fund is down only 2.4%. Compared to its peers -- it's a pretty good performance.

But for battered hedge fund investors, this isn't good enough. If anything, this means that they are likely to rush to redeem shares.

Indeed, that's what has happened with Blue Mountain. In fact, the fund has put a freeze on $3.1 billion of the Credit Alternatives' assets. Interestingly enough, the fund is offering investors a lower fee structure to retain them.

Why is this happening? Well, hedge fund investors – who include pensions, institutions, endowments and wealthy individuals – are trying to find ways to get cash. What's more, even those investors who don't need cash may decide to pull their money out anyway because of the fear that other redemptions will force Blue Mountain to dump its positions, trashing returns.

Basically, this is an old-fashioned "death spiral" and it is afflicting the massive hedge fund industry.

According to Reuters, hedge fund withdrawals amounted to $31 billion between July and September. That's about 11% of the total assets of the industry.

Unfortunately, the end of November is another window when hedge fund investors can elect to redeem shares. Thus, the unwinding may be still in the early stages, which is likely to put even more pressure on the markets.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

As a general rule, the IPO market is highly sensitive to market volatility. And, the latest bout of financial turmoil has been brutal.

According to a recent report from PricewaterhouseCoopers' Transaction Services Group, the number of IPOs in the U.S. has declined for three straight quarters. So far this year, there have been only 54 public offerings, raising a mere $31.2 billion. This compares to 195 offerings in the same period last year (with $44.7 billion raised). Keep in mind that this year's numbers were heavily impacted by the Visa Inc. (NYSE: V) offering, which raised $17.8 billion.

As for Q3, there were 12 IPOs (for a total of $1.9 billion). This was the slowest since 2003.

Of course, the credit crunch has been a big culprit. But there are other reasons. For example, the various hedge fund failures have been a big problem. Plus, as the U.S. economy slips into recession, there's little appetite for risky growth stocks.

However, when the IPO market comes back -- and it certainly will -- it's likely that we'll see high-quality companies go first. After all, investors will want top quality. What's more, the valuations are likely to be attractive. But, it could easily be another year until this happens -- as the banking system stabilizes and growth perks up in the U.S. economy.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

Memo to T. Boone Pickens: before you write another book about the art of the comeback, make sure your comeback is complete and that your career is on stable ground.

On September 2, Pickens' book The First Billion Is the Hardest: Reflections on a Life of Comebacks and America's Energy Future hit the stores. Now he's in need of another comeback as a huge pullback in energy prices and investor withdrawals have sent the value of Pickens' hedge fund assets down to less than $500 million. When his fund peaked in June, he was managing $2 billion.

With the market in the toilet and investors fleeing for the exits, Pickens has reportedly moved the fund almost entirely into cash -- perhaps a sign that he has abandoned his long-term bullish outlook on oil prices.

However, Pickens' contributions to America now go beyond wealth-building. While he initially made his name as a Carl Icahn-style corporate raider back in the 1980s, he's moved on to finding solutions to our dependence on foreign oil. The Pickens Plan has garnered the support of the Sierra Club, former Clinton Chief of Staff John Podesta, and even Senator Barack Obama -- an impressive feat given that Pickens is an ardent Republican.

And he's not out money yet. Apparently he just gave $63 million to Oklahoma State to pay for a football stadium.

With the plunge in the markets, the hedge fund industry has gone into a tailspin. Even top hedge fund managers -- such as Citadel Kenneth Griffin, Paul Tudor Jones, Steven Cohen and so on -- are having troubles. In fact, there's talk of hedge fund failures, consolidation, and increased regulation. For example, hedge funds may lose 15% of overall assets by the end of 2008. Keep in mind that the average hedge fund is down a stunning 18% this year.

Yet, there are some wily hedge fund managers that are striking fortunes. Perhaps the most notable is John Paulson, who manages Paulson & Co. His fund scored $15 billion in gains last year. Basically, he shorted a variety of complex mortgage securities.

Interesting enough, Paulson's hot hand has continued. That is, his funds have seen increases of 15% to 25% so far this year.

In fact, if he can maintain this pace, Paulson will have personally amassed a $3.5 billion over the past two years.
Oh, and Paulson has 70% of his assets in cash right now. In other words, when the markets settle, he'll be a nice position to capitalize on things -- and make even more money for himself.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

The dollar and yen surged Friday -- with the yen the clear winner head-to-head versus the dollar -- as traders and institutions added both currencies in a flight-to-safety on concern that all of the world's major economies will fall into a recession at the same time.

The dollar surged 3 cents versus the euro to $1.2642 and 6 cents versus the British pound to $1.5606.

The yen strengthened 4.7 yen to 92.64 versus the dollar and about 10 yen to 144.73 yen versus the British pound.

Institutions raise cash in dollars, yen

Currency Trader Andrew Resnick told BloggingStocks Friday, this morning's flight-to-safety is not solely due to economic fundamentals, which suggest slowing growth in the world's major economies, but also hedge fund / investment fund de-leveraging and closing out of losing stock positions.

"We're seeing many things happen at once, and that's producing these enormous moves. First, the carry trade [where traders borrow yen and invest it elsewhere] is unwinding. Leverage for investing purposes is declining as a trading strategy," Resnick said. "Second, major players are raising cash to cover redemptions, which is also causing stock markets globally to plunge."

"Third, we're seeing a re-pricing of risk to the higher, which is forcing some funds to raise even more cash, boosting the dollar," Resnick said. "Some of the moves are cash-necessary moves, but many are clearly panic-based, with traders exiting positions that have little chance of succeeding if the global economy continues to slow."

It was an easy ticket to riches – becoming a hedge fund manager.

However, it looks now like these entities weren't hedging much. If anything, they were rolling the dice with investors' money. And now we are seeing the huge unwinding of major hedge funds (what are now called "hedge fund failures"). The upshot has been extreme volatility.

Do hedge funds have a future? Perhaps. But things are likely to be grim. This week, a major hedge fund manager -- Citadel Investment Group's Ken Griffin – gave a presentation that affirms this outlook.

He says that the governments of the world are in the process of putting chains on hedge funds. At the same time, there will be lots of support for traditional commercial banking institutions. Thus, it's no surprise that Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) have quickly transformed themselves into banks -- even if it means lower profits.

So, with about 8,000 hedge funds and trillions in assets, it's going to be pretty tough to thrive in the new environment. In other words, expect consolidations as well as closures.

What a difference a year makes.

A year ago, October 2007, oil vaulted above $85 per barrel on its way to the unheard-of (at that time) price of $100 per barrel. Oil would reach a high of $147.90 per barrel in July.

Along the way several research reports predicted a $175-$200 price for oil in the near future. The weak dollar played a role in the astronomical price rise of the world's most important commodity, as did speculative and momentum players (hedge funds, investment funds), but the real culprit was rising emerging market oil demand.

Another October Surprise (of sorts)

Fast-forward to this October: emerging markets are still growing, but every other factor is now bearish for oil, says energy trader Jim Dietz, and oil's price is in free fall, plunging another $3.99 to $67.55 per barrel Wednesday morning. The United States economy is in recession -- not officially, but nearly every key indicator is. The U.K. and E.U. economies are slowing. Moreover, the financial crisis threatens to slow the growth in global trade, if not lead to outright trade volume declines, implying further declines in projected oil demand. "It's a market that's pricing in substantially slower global economic growth, possibly a global recession," Dietz said. He added that he was currently short oil, with a monthly contract.

Moreover, those searching for an oil bottom may be hard pressed, Dietz said. "There's considerable technical support for oil in the $63-67 range and then again at $60, but these barriers have not provided much support in this market," he said. "That leads me to believe that the unwinding [closing] of hedge fund positions is a big factor in driving oil lower. They're getting out of crude, big time."

A little less than a year ago I wrote about Andrew Lahde, a California-based hedge fund manager who earned his investors 1,000% on their money with huge bets on the collapse of subprime.

Now he's closing up shop, and the missive he sent his investors is quite possibly the most brilliant piece of writing since Don Quixote. You can read the whole thing here, including Lahde's thoughts on aristocracy, meritocracy, marijuana legalization, Paxil, alternative energy and BlackBerries. Here are some of my favorite quotes:

"I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."

Lahde also opined: "At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers."

Forward Lahde's letter to everyone you know -- it's a classic of hedge fund literature, right up there with Dan Loeb's "Get thee to the Hamptons" screed aimed at a CEO who wasn't making him rich enough fast enough.

August 2007. You remember the month.

Oil had zoomed through $70 on its way to almost $100 by year's end, and soon there were research reports arguing that oil would top $150 or even $200 in the year ahead, on surging global economic growth.

Few knew it then, but the month also marked the start of the subprime mortgage default problem -- first deemed isolated, then sector-wide in scope, and that now encompasses every corner of the globe, in the world's most serious financial crisis since the Great Depression.

Concern over the credit crunch and an accompanying slowdown in global economic growth sent oil prices below $70 Thursday for the first time since August 2007, with crude plunging $5.04 to $69.50 at mid-day. Oil has now fallen 53% since hitting an all-time high of $147.27 per barrel in July.

The other major energy commodities also continued their nearly month-long downtrend. Heating oil fell 11 cents to $2.07 per gallon, unleaded gasoline plunged 17 cents to $1.61 per gallon, and natural gas fell 6 cents to $6.65 per million BTUs.

Kenneth Griffin, who manages the massive Citadel Investment Group Inc. hedge fund, has produced a sterling record over the past 20 years. Actually, he's one of the world's top money managers.

But, in "Black September," Griffin's tracked record got trashed. Apparently, his flagship fund is down as much as 22% for 2008.

Interestingly enough, Wall Street has been abuzz with rumors that Citadel is dumping lots of shares – putting further pressure on the markets (and may have accounted for some of yesterday's losses on the Dow and S&P).

But Citadel is not alone. Other hedge fund operators have also suffered major losses.

One key issue has been the erratic regulatory response to short selling (essentially, the ban made it illegal for hedge funds to make profits). Of course, investors have also been requesting redemptions.

In fact, it looks like some key hedge fund managers are staying on the sidelines (can you really make money when the markets look irrational?)

As for Citadel, the fund had some other problems. For example, Griffin loaded up on convertible securities. While such things are okay in normal times, they can become illiquid during periods of crisis. Besides, the short-selling ban made it excruciatingly difficult to employ arbitrage strategies.

Something else: with the significant losses, hedge funds will have a hard to getting incentive fees. The reason is that they need to recoup the losses (this is known as the high-water mark). As a result, many hedge funds may decide to close shop.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.