Hedge funds: You can run but you can't hide
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Hedge funds: You can run but you can't hide

A snowboarder in Utah says we're heading for a global liquidity squeeze: capital will self-destruct and the world financial system will need to reinvent itself, as it did after 1929, 1945 and 1971. He may be wrong. If he's right, what does it mean for the dealers and investors who grew rich and famous on global euphoria? David Shirreff reports.

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According to their fans, hedge funds fared best in the October/November turmoil in emerging markets. Hedge funds, traditionally risk-averse, can steady their returns in volatile times. They tend to run offsetting long and short positions designed to profit from pricing anomalies and low-risk arbitrage.

Funds such as unit trusts and mutual funds, which can run only long positions, naturally fared worse as the markets dived. Some other open-ended, long-only funds suffered huge redemptions as investors fled the most volatile markets, especially south-east Asia. "There's a limit to what you can do," says a beleaguered long-only fund manager. "You can raise cash to maximum limits and head for markets that have fallen already." Another reasonably successful long-only manager relies on "good stock-picking and picking non-correlated countries". But with global contagion, and an exodus of US investors from emerging-market mutual funds, earning a positive return is increasingly difficult. In the meantime, hedge funds have been able to sell futures, borrow stocks and write index swaps with investment banks.

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