Hedge funds on a bubble?

The mysterious world of hedge funds continues to attract some unwanted business press as October proved once again to be a nasty month for financial matters. Traditionally October brings bad news, what with a depression and a couple of economic meltdowns in the last 80 years or so. So it's not unusual to see financial managers anxiously count the days down to the end of the month.

This year in addition to the woes of General Motors which has been battered all month long by bad news, hedge funds started to shed some of their mystery. Unfortunately for fund managers, the sudden attention caught up with them when Refco announced its financial problems. The American hedge fund found itself under suspicion when its CEO was discovered holding a huge amount of hidden debt from the company. The repercussions of that discovery apparently has rumbled through the financial world, sending more than a few investors for the doors while the getting is still good.

The troubles in hedge funds have now moved beyond American shores, as one of England's largest fund managers Gartmore, proclaimed that "something is broken in European equity markets", not the most positive of statements from those controlling billions of dollars of wealth.

The whole hedge fund culture has been a rather mysterious little affair, rumors of scandal or collapse regularly dog these instruments of wealth. The situation tends to create a bit of a bubble economy, many folks may be thinking the time to exit is at hand before things get worse, which of course tends to only exacerbate the decline of any investment. Paul Krugman did a nice job of explaining how one fund went sideways a few years ago, when published his Tiger's Tale. The hopeful ending to the taleat the time, is now somehow not quite so promising unfortunately.
The prediction that 1600 hedge funds will go broke in the next two years probably doesn't do much to shine up the hedge fund image of late either. Worries on what this all might do to the world economy, must keep your average G8 financial minister up late nights wondering what impact it will have on their little corner of the world.

Of course part of the problem is the secrecy of these things, little is known about them, nor how they generate wealth and as long as the money comes in everyone is willing to play musical chairs, it's when the music stops that will make a difference. Somebody isn't going to have a place to sit then, all that remains to be seen is how many chairs actually disappear.

October is normally the cruelest of months for stocks, but this time around it may only be the set up month. Nervous managers and investors watch that calendar flip with interest and a wee bit of trepidation.