It may dash your hopes for that nice warm feeling called Schadenfreude, but the Masters of the Universe are smarter than the people they left behind at the investment banks. Their hedge funds have blown up here and there, but unlike the investment banks, they are still very much in business. They have hurriedly pulled themselves into defensive positions inside their shells, like turtles. Their Armageddon, if any, will not come for two more days, which is to say, Tuesday, Sept. 30.
Most hedge funds open up a crack on Sept. 30, Dec. 31, March 31 and June 30 to give investors the chance to “redeem” their investments, meaning take their money out. These moments are called gates, like a series of gates in a prison. The gate is the limit, the fixed percentage of your money, that the fund will allow you to take out at one time. Even with these strict caps on withdrawals, some funds may end up nothing but shells.
The above passage is from yesterday's NYTimes op-ed by Tom Wolfe, who also wrote The Bonfire of the Vanities.
Digression: Am I the only person who stopped reading that book after about 100 pages? At that point, I asked myself, "Why am I reading about otherwise smart people whom I know are going to continue making stupid choices?"
Update: Perhaps in anticipation of the sell-off tomorrow, some people have begun unloading their stocks today, contributing to the decline in the major indices so far (11am, EST). However, Craig Newmark notes that if hedge funds are overselling stocks to meet investors' liquidity demands, there should be some good bargains out there that won't last long.
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