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 on the development of the hedge fund clone concept being created by big Wall Street firms. These clones basically try to earn the returns of hedge funds without paying the normal 2/20 fee structure.

For those unfamiliar with it, 2/20 refers to an annual "management fee" of 2% and a performance ("incentive") fee of 20%. When compared to any index fund, and even mutual funds, these fees seem ridiculous. However, there are many funds in the hedge fund industry that do in fact justify these fees.

The goal of these funds is basically to mirror the hedge fund index, or a group of hedge funds pooled together to be more diversified than investing in a single hedge fund. While this strategy has its benefits in reducing volatility and the chance of a blow-up, it also has its downsides. According to my friend James Altucher, fund of funds manager and president of StockPickr.com:

"Hedge fund clones are fine because they are all mediocre (i.e., like the average hedge fund). The real reason to go into hedge funds is to find the next SAC."

Basically, the returns of the "clones" will not match the returns of the best and brightest hedge funds on the street, such as SAC, Moore, or Tudor.

While this seems like an interesting proposition, the minimum investments remain very high at this point so the concept doesn't really bring much to the table for investors who are not accredited. As the WSJ said, this seems like another investment for the yacht-club set.