Hedge funds retreat to cash

The end of the BSD

The dirty little secret of the late boom? Many of the people who succeeded most flagrantly did so not because they were great at figuring out ways to make huge amounts of money. Rather, they scored because they were great at figuring out ways to make small amounts of money and then magnified their returns through the massive use of debt.

The Securities and Exchange Commission this week issued an order banning the short selling of several hundred financial stocks. As a result, many hedge funds are pulling in their horns and running for safety. […] The BSDs are investing like grannies who survived the Great Depression. Riding out the storm by parking assets in cash is a smart strategy for a hedge fund that has already scored big gains for the year. But most hedge funds haven’t. Earlier this week, it was reported that, globally speaking, only one in 10 hedge funds is earning performance fees—i.e., the 20 percent of the fund’s gains that the managers keep as compensation.

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