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Sept. 24, 2006 Looming on the horizon is the potential for a financial bubble burst every bit as big as the great Internet bubble of 2000. This time it is the hedge funds who will have their turn in the barrel. A qualifier – not every hedge fund will be hit in the same manner. The main marks will be the hedge funds that have invested heavily in oil, natural gas, and some commodities. As the price of gas and natural oil deflate, those who have bet the other way will be exposed in a major manner. The hedge fund bust will be bigger than many anticipate due to the secretive nature of hedge fund investing, the tendency to tuck a lot of dollars into gas and oil, and the tendency of some hedge funds to employ simple leverage rather than true hedges. When will the bust take place? The bust will take place over the next few months, and may already be underway. Recently both MotherRock and Amaranth Advisors were rocked for huge losses. Amaranth’s very existence is in question at this point, losing over half of its $9 billion in value in a week. Such are the high risk stakes in the hedge fund game. Hedge fund’s secretive ways became murkier after a court disallowed the U. S. Securities and Exchange Commission’s attempt to shed more light on what exactly the hedge funds are doing, and with whom. Since the court’s ruling on disclosure, 106 hedge funds have withdrawn their registrations and disappeared into the fog. In a Bloomberg article, Jesse Westbrook writes that Former SEC Commissioner Harvey Goldschmid commented “I have said for a long time while a train wreck might well occur because of a failure of adequate regulatory oversight. Amaranth only indicates the continuation of the concern.” While he held the chairmanship of the Fed Board, Alan Greenspan also noted some concern about risk posed by hedge funds. Hedge funds currently account for approximately a third of the value in U. S. equity trading. Currently, the Treasury Department is specifically checking on the effect hedge funds have on financial markets. These concerns are timely, particularly for hedge funds that have invested in gas, oil, and commodities. In an AP article, Houston-based oil consultant Dan Lippe of Petral Worldwide said that with worldwide supplies growing, he wouldn't be surprised to see oil back below $50 a barrel, and perhaps as low as $40, within a few years -- if not sooner. Natural oil supplies are also historically high. Hedge and other speculative positions have run from 25 to 40 percent of the market. What will happen when everyone heads for the exits at the same time? One of the biggest bubble bursts of all-time. The fallout will be widespread and hit at a lot of big name financial leaders. Morgan Stanley, Goldman Sachs, Credit Suisse and Deutsche Bank are said to have had money involved with Amaranth. The pain will also hit public pension funds as many have been stuffing money into hedge funds in the past couple of years; San Diego’s public employee fund had money invested in Amaranth. When the gas and oil heavy hedge funds crash, scrutiny will turn to those who took on too much risk, as well as the whole operating model of the high risk hedge fund. Those who head up such hedge funds will try to cover their tracks as much as possible prior to public scrutiny. David Weidner writes in MarketWatch that “it’s no surprise that the Amaranth losses have sent some into panic. The fall of LTCM eight years ago is still a vivid memory in the financial community.” As more hedge funds who are in gas and oil start to pull out, there will be a rush for the gates among more and more. The fact that this can all be done in secret adds to the confusion. Many hedge funds trade through the InterContinental Exchange (ICE), an electronic exchange that has little governing oversight. Matthew Goldstein writes that Michael Greenberger, a professor at the University of Maryland Law School and former Director at the Commodities Futures Trading Commission recently noted that “it will come out that ICE was a market that was heavily used (for secretive hedge bets). The ICE loophole allows for off-market trades.” Off-market trades and who knows what else has been going on in hedge funds lately? Caveat Emptor to all who have held money in one of these hedge fund that have held gas and oil bets, as the rubbish is just starting to hit the fan. ------------ About the author: Dwayne Hines currently has 12 books selling in major bookstores and writes for major magazines such as Physical and FitnessRX. Email Dwayne Hines: dhines@cpu-net.net Comment on this article here! ------------ All articles are EXCLUSIVE to Useless-Knowledge.com. Please link to this article rather than copying and pasting it onto your site (which would be unauthorized and illegal). |
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