Monday, September 29, 2008

Watch Out Tomorrow...

UPDATE: Its not entirely clear to me that even if a flood of orders for redemptions come tomorrow (for the end of the year) that it will necessarily lead to a big selloff tomorrow --this may just occur over the 4th quarter. Of additional concern however, is that end of quarter reporting or "window dressing" may force the unwinding of positions tomorrow.

We may have even more chaos to look forward to in financial markets tomorrow as hedge fund redemptions cascade in for the end of the quarter as the NYT reports:

Even as Washington reached a tentative agreement [ed. note ...ha ha] on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

“Everybody’s watching for redemptions,” said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. “And there could be a cascading effect, where redemptions cause other redemptions.”

(emphasis mine)

I wrote the following commentary over at Daily Kos:
My own view of the crisis is that the absolute first priority right now is to re-capitalize the banks as soon as possible and to worry about some of the other stuff later. I am so proud of the Democratic leadership today. I respect the views of Kossacks who opposed the legislation...but I think the Democrats who voted for this bill should earn a badge of courage. I don't like this bill that much either ... but really this is no time to be taking chances on another Depression. In my view no one knows what will happen but prudent risk management is to avoid the kind of contagion that I fear is coming down the pike.

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