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Market Volatility Shuts Two Hedge Funds


From NPR News this is All Things Considered. I'm Melissa Block.


And I'm Michele Norris. First this hour, the economy. In a moment, we'll hear about the impact of the financial crisis on a city in Ohio, but we begin with Wall Street and the hedge fund industry. The Dow jumped about 400 points today after a stinging loss yesterday. But this week, the havoc in the markets claimed two more casualties. Highland Capital said it was shutting down two hedge funds because of what it called unprecedented market volatility. NPR's Jim Zarroli joins me now. And first of all, Jim, the market seemed to be all over the place over the course of the day. What should we make of the close?

JIM ZARROLI: Well, you know, this is the kind of thing that often happens after you've had big declines in the market. People come back and snatch up bargain stocks. And that seems to be the best explanation for what happened today. It really happened late in the day. It's not totally clear what direction the market is going in right now.

NORRIS: If we could move on to the hedge funds, they have been one of the fastest growing parts of the financial sector. It sounds like they're not doing so well right now though.

ZARROLI: Yeah, I mean, it's not easy to get information about hedge funds because they really aren't regulated. But there are companies that try to ferret this stuff out. One of them is TrimTabs. And it says that in September, investors took $43 billion out of hedge funds. Here's analyst Conrad Gann.

Mr. CONRAD GANN (Chief Operating Officer, TrimTabs): There are a number of prominent firms that are down 20, 25 percent. We looked at one list and we saw 39 name-brand, large mega-billion-dollar funds, all of which lost 10 percent or more in September.

ZARROLI: And Gann says that's just September. October is probably worse because, you know, stocks have fallen so much this month.

NORRIS: What are hedge funds doing in response to the downturn in the market? Are they somewhat more protected?

ZARROLI: Well, you know, the problem is that they are highly leveraged. In other words, somewhere along the line, they took their assets and borrowed against them so they could invest even more, just a way of maximizing their profits. So now they have to pay back what they owe. The only thing they can do is sell stuff off. And some analysts will tell you this is a big reason why the markets have fallen so much lately. We've just had a huge wave of selling by all institutional investors, but especially by hedge funds.

NORRIS: Quickly before we let you go, is Highland Capital perhaps a bellwether? Are we likely to see more hedge funds go under?

ZARROLI: Well, there's no question it's already happening. On the other hand, you know, hedge funds have certain things in their favor. They have a certain latitude about how they invest their money. One of the things that's happening right now is that hedge funds have sold off assets and are just keeping the money around as cash on their balance sheets. And they're kind of waiting on the sidelines for a chance to reinvest it. So when the stock market finally does begin to recover, you'll see this rush of hedge fund money back into stocks. But for now, a lot of them are just waiting.

NORRIS: Thanks, Jim.

ZARROLI: You're welcome.

NORRIS: That's NPR's Jim Zarroli speaking to us from New York. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Jim Zarroli is an NPR correspondent based in New York. He covers economics and business news.