The New York Times ran an interesting piece today highlighting the scary situation in the hedge fund business, especially those dabbling in the quantitative-trading game. As I reported in an earlier post today, the poor performing quant fund managers are going to be forced to explain their poor performance to their investors during this week.

But New York Times columnist Landon Thomas Jr. did all the explaining we need -- all of the quants on Wall Street know each other and are using the same trading models. Understandably, when the sun shines for these firms nearly all of them perform incredibly well. However, as we're seeing now, when 's--t hits the fan' for one of these guys it seems like every quant is plagued with weaker performance and the like.

It should come as no surprise that this kind of group thinking leads to much greater volatility in the market. As the term 'market' implies, supply and demand are king in stock price movement. As a result of the group thinking in the marketplace at present, when one fund wants to buy it seems like five more become interested. This is great for the market when everyone is a buyer and the market is continually fueled higher. But when one fund begins selling, five more begin their sales.

If you're looking for further evidence on the pervasiveness of group thinking amongst stock market participants you don't need to look any further than the increasing popularity in "copy me" sites like StockPickr.com, which focus precisely on group thinking and becoming part of the 'smart money' herd.

The Wall Street Journal is reporting [subscription required] that poorly-performing 'quant fund' managers will be forced to explain their recent poor performance to investors in their funds beginning this week. Despite normally remaining quite secretive and under-the-radar, many of these fund managers are being forced to hold conference calls in order to save the reputation of the firms they work for.

All of the negative news from investment bank-owned hedge funds such as that from Bear Stearns (NYSE: BSC), Barclays (NYSE: BCS) , and Goldman Sachs (NYSE: GS) points to significant risks in the asset management business. When times are good, profits and positive news from the hedge fund businesses inside these investment banks is plentiful. But when times begin turning bad, as they seem to be now, the risk of destroying a firm's reputation is quietly intertwined with any signs of poor performance.

Investors need to now be extra careful before investing in the financials. Derivatives exposure, topping private equity activity, hedge fund risks, and subprime vulnerability are all uncertainties and potential sources of destruction that need to be remembered before purchasing these stocks.