Hedge Funds in Hot Seat After Market Plunge

Plunging stock prices, redemptions coincide to deal industry a one-two punch

By Clay Dillow, Newser Staff

Posted Sep 30, 2008 10:19 AM CDT

(Newser) – At a time when markets need their money more than ever, the $2-trillion hedge fund industry could fall victim to bad timing, as yesterday's plunge coincides with today’s deadline for many investors to withdraw before year’s end, the Wall Street Journal reports. Funds may be forced to sell off stocks before they have a chance to recover, to compensate fleeing investors.

Even a short-term pullback by hedge funds would in turn hurt the market, accelerating the down trend. And while stronger funds can be expected to resume their growth, some are likely to fail."There's going to be a death spiral for a number of these funds, and I don't think we've even begun to see the unwinding," says the president of one brokerage firm. Even before the nosedive, industry-watchers had expected hedge funds' assets to be down 10% to 20% this year.

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Trader Gregory Rowe works on the floor of the New York Stock Exchange Monday afternoon Sept. 29, 2008. Markets plunged on news the House failed to approve a bailout for financial markets. (AP Photo/Richard Drew)

A statuette of Homer Simpson screaming sits on a work station in the S&P 500 futures trading pit Monday, Sept. 29, 2008, at the CME Group trading floor in Chicago as markets plunged. (AP Photo/M. Spencer Green)

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There's going to be a death spiral for a number of these funds, and I don't think we've even begun to see the unwinding. - Mark Lehmann, president of JMP Securities in San Francisco

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Hedge Funds in Hot Seat After Market Plunge