Fall of the Market

One aspect of the crisis can be summarized as follows

Hedge Funds which are unregulated entities have mushroomed in recent years. The people who run hedge funds are paid 1-2% of the assets they manage. In addition they are paid a handsome comission if they meet certain targets. Usually it involves beating certain benchmarks. One of the ways to beat the benchmarks is to take risks. Leverage is one form of risk. As the hedge funds took more leverage they were more at risk in case of downturn. As the housing mortgage crisis took a toll on the stock market a lot of hedge fund managers decided that they were not going to meet their targets. They decided to liqudate their existing entities and close shop. They can always open a new hedge fund. The volatility in the market is explained by hedge fund sellings. A lot of players are selling into market rallies. No one knows how long this will continue. That is the honest answer people can give you.

This has certainly created a lot of opportunities. Energy and commodities have been on a downward spiral. When India and China recover their 2 billion plus population requires a lot of energy and raw materials. Wireless in emerging markets is another play. Most emerging markets do not have a landline network. Cellphone is only way to communicate. Technology is another sector. We need improvements in semiconductor, wireless, computing technology to improve our lives. Precious metals is another opportunity. The massive injection of liquidity sets the stage for some inflation. Gold and precious metals will benefit from these.

Please be careful when entering the market. These are definitely uncertain times.