Feeling the fear?

Let us assume that hedge funds manage USD2 Trillion (a number banded around by many commentators). If 25% of these assets were redeemed by cash hungry investors, as is quite probably the case as cash really is king , then USD500 billion sales orders would hit the markets immediately. Imagine that. The markets would tank like nothing you have ever seen before. The reason it hasn't happened is because many funds have been forced to gate or close to halt redemptions. This is good news. For the time being.

Right now, that is where we are. There are investors chomping to get their investments back. However, as investors tried recently to claw open RAB Capital's closed special situation fund, they soon realised that liquidating meant realising considerably less than if they hung on in there with the losses accrued to date. So they have left it closed until better liquidation times appear. Question is how long will it be for these better times to appear? 3 years? 10 years? 20 years?

As much as bailing out and re capitalising banks is helpful (where did the tier 1 capital go, that's what I want to know) the real fear is this 25% redemption happens at once. The systematic risks are considerable. Ignoring the current plight hedgies are facing of deleveraging as lenders ask for their loans back, mass redemptions are potentially much more frightening than saving a few banks with bad debts.

If you think the central bankers have saved the world you are wrong. They have saved a run on deposits, that is for sure, but cushioning us against a 1930s depression then they have a long way to go. Locked up funds are saving us all from a serious meltdown.

We should thank the lawyers who helped the hedge funds lock in their assets. Without them, we would be facing an even bleaker future. If other lawyers try an muscle in to open up these locked assets, then you can blame them for bringing down your livelihood. But they won't.

So my award to saving the planet goes to Simmons & Simmons who pioneered many of the hedge fund structures and tight ass fund prospectuses.

Remember hedge funds provide most of the markets liquidity. Given investment banks have given up and turned into loans and deposits house, hedge funds are all we have left and as usual, hedge funds are holding it all together. Fear not for we are your protectors.

Yesterday's sell off demonstrated how quant models are struggling with volatility and margin calls are forcing selling. I will say it again, but the distortion by governments has made the situation much worse than if they had left it alone to sort itself out.