Hedge funds, the opaque and often vilified investment vehicles that aggressively maximize profits while flying under the radar, are contributing to the turmoil in the equities markets.
Plunging stock prices have wreaked havoc on hedge funds, which employ sophisticated trading strategies and can often profit from market anomalies or a company's demise. September was the second-worst month for hedge funds since the industry group Hedge Fund Research Inc. began tracking their performance in 1990.
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When hedge funds fare poorly, nervous investors withdraw their funds. Redemption requests, as the withdrawals are called, in turn force hedge funds to sell assets — stocks they hold — to raise cash to pay back investors.
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Longo, who also oversees hedge funds for an investment group, estimates that as much as 25 percent of the stock market's recent declines are due to hedge funds selling assets to meet redemption requests.
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The magnitude of hedge fund sell-off is expected to worsen. Ang said it's possible that 20 percent of the estimated $2 trillion in hedge-fund assets could be sold by the year's end.
What's more, Ang said, is once hedge funds – which are heavily leveraged — sell assets, they have to sell more assets to raise cash to reduce their debt load. "This effect might be much larger depending on what the leverages are of these funds," he said.
Investors receive reports on their hedge funds' performances each quarter typically, and usually must request redemptions three months in advance.
The likely losses will reshape the hedge-fund industry. Though the extent of the impact is a matter of debate, many experts agree that the coming months will see the collapse of many of the more than 10,000 hedge funds.
Detail: Hedge funds add fuel to crisis
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