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 He guesses that between $350 billion and $420 billion will be withdrawn by the middle of 2009 and that $150 billion has already gone.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

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.

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.

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.

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.

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.

According to a piece in the Wall Street Journal [a paid publication], a variety of top-flight hedge fund managers have been going aggressively to cash. Some of the names include Paul Tudor Jones, Israel Englander, John Paulson, David Slager and Steven Cohen. In fact, it looks like Cohen is 50% cash and Paulson is about 75% cash.

These actions may reflect some technical factors. After all, hedge funds are likely to receive an avalanche of redemptions. Something else: the recent changes in short-selling rules have made things much more complicated (hey, when might the SEC decide again to ban the practice?)

Yet, these hedge fund managers have stellar long-term track records and have weathered the recent declines fairly well.

Besides, we have seen a recurring theme of a plunge/surge cycle-which is far from normal. If anything, it's a sign of irrationality. And if this is the case, how can you really make solid investment decisions?

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.

MetLife, Inc. (NYSE: MET), which is the largest life insurer in the U.S., got its start 140 years ago. But the recent couple weeks may have been the toughest as the stock price has plunged.

It seems MetLife's woes have just started, though, as the company announced Tuesday it has withdrawn its 2008 earnings estimates. As for Q3, the company expects operating profits of $600 million to $675 million.

At the same time, the company wants to sell 75 million shares to bolster its capital (obviously, this is something that's pretty dilutive in the current environment).

Interestingly enough, MetLife is feeling the pain from heavy investments in alternatives such as hedge funds and private equity. What's more, MetLife holds positions in losers such as Washington Mutual and Lehman Brothers.

Of course, MetLife is not alone. If anything, major insurers have been quite aggressive with alternative investments. Just take Hartford Financial Services Group Inc (NYSE: HIG), which recently pre-announced weak results and raised $2.5 billion from Allianz. This firm too has had to take charges for its alternative investments.

MetLife shares are trading down 6.4% in pre-market trade.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He is also the founder of BizEquity, a valuation website

Earlier this week I wrote about what a bad idea the SEC's new rule requiring short selling hedge funds to disclose their positions was:

Mandatory disclosure of short positions will expose fund managers to issuer retaliation, frivolous lawsuits and harassment. What's so ridiculous about this rule is that a short position in a stock does not represent ownership of a security, and other than subjecting short sellers to harassment, there is no reason to require that the positions be publicly disclosed.

The SEC failed miserably in its responsibility to protect investors, and now it's compounding that mistake by targeting the wrong enemy.

Happily, the SEC has since seen the light. Short sellers will now be required to disclose their positions to the SEC -- which is fine -- but will not be required to make those disclosures public. If you like PDF files, you can read the announcement here.

What's so hypocritical about this is that while press releases posted prominently on the SEC website were made available for the crackdown on naked short selling and mean trash-talking hedge fund managers, you have to do a bit more digging to find the new announcement that backtracks.

It just goes to show what many of us have been saying all along: the "crackdown" on short sellers was just pathetic grandstanding by an agency that failed miserably in its duty to protect investors from misleading statements by public companies.

As hedge funds search for capital to pay back bank loans they have taken to buy stocks and other financial instruments, they may not find anything to do other than sell their own holdings. According to The Wall Street Journal, investment banks think "between 10% and 20% of the hedge-fund industry's assets to be withdrawn by year end."

The hedge fund industry has $2 trillion in assets. So, what is the market to do?

One possible solution is to open the Fed borrowing window, which is available to banks and brokerages for short term loans at very low prices, to the hedge fund industry as well. Average people and many politicians would not like that idea, but faced with a liquidation of assets that could drive the DJIA down by hundreds more points, why hold out Federal Reserve aid from a part of the financial industry if it could help ruin the system further?

Greedy and rich hedge fund managers may not deserve any mercy, but the market may have to give them some or watch the liquidations of assets pull everyone's investment values down.

Douglas A. McIntyre is an editor at 247wallst.com.

Hedge funds have decided to curtail their risks. That means no reward. The reason for putting money into hedge funds, big upside for investors, may be going away.

According to the FT, "Citigroup estimates that hedge funds have now placed $600bn in cash, and that $100bn of this is held in money market funds." These large investment firms do not want to be crushed by the current credit crisis.

The hedge funds are making a mistake by turning away from their charters to use leverage and chancy tactics to make money, even it the odds have become extraordinarily higher.

Distressed assets could become the next great wave of money-making investments. Even the Treasury thinks so. It is telling Congress it can make money on the toxic assets it is buying from banks. Those financial instruments may come back with improvements in the housing and mortgage markets.

The banking market is also awash with corporate IPO debt which often sells for 80% of its face value. Some of these investments will fall apart, but most of the companies are likely to be fine coming out of a recession.

Hedge funds are turning their backs on what may make them extraordinary money machines during a time when potential rewards are reaching a peak.

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

Third Point Management fund manager Daniel Loeb told his investors last night the firm is the target of a formal investigation being conducted by the Securities & Exchange Commission. According to Loeb, the subject of the investigation is his communications with other hedge funds.

The investigation appears to be an outgrowth of a conspiracy theory that a cadre of hedge funds engaged in nefarious campaigns of rumor-mongering and aggressive short-selling aimed at bringing down companies like Bear Stearns. The fact that the companies crying foul have lost billions and suffered from serious transparency problems is deemed irrelevant; bad management doesn't destroy companies, short sellers do, according to this line of thinking.

Loeb wrote that questions about the fund's communications were first raised during a routine audit last year, but added that its lawyers had said that such communications were legal under federal securities laws.