Hedge Funds Anxious For Markets to Crash

Did I already point out that our financial system is one big cannibalistic orgy, where hedge funds get excited when the market's about to dive.

"Hedge funds are an insurance, a way to protect capital during stock market down periods ... Most people only remember that when equities crash" . . .

Hedge funds delivered strong returns in the first quarter of this year and with market volatility expected to rise and clear trends evident in currencies and bonds the omens for 2006 are good . . .

"It's been a good start ... There is a very good chance that we will do better then we did last year," said Ian Morley, chief executive at Dawnay Day Olympia . . .

Whether hedge fund returns do exceed those of equities this year remains to be seen and few are prepared to forecast the sort of event that could trigger a major stock market correction.

But the fact that wealthy individuals, who are usually ahead of the game and who have been heavily invested in stocks for the last three years, are once again focusing on hedge funds is a clue that equity market sentiment could be turning negative.

If hedge funds do beat stocks this year it will be the first time since 2002 when they returned an average around 3.0 percent compared with losses of 19.5 percent for the widely-watched benchmark MSCI index of world stocks.

OUCH! And you think that's coincidence? Think again. Hedge funds, just like other moneylenders, profit from other people's losses.

[Hedge funds] preserve capital because they offer above zero or absolute returns and can use derivatives and short sell -- gamble on a lower price for a security in the future -- to protect against and benefit from price falls.

"Hedge funds need either a clear trend, it doesn't matter which way, or they need volatility," said Ashok Shah, chief investment officer at London & Capital.

"The opportunity set was quite good for them in the first quarter and it remains as good in the second quarter."

Hedge funds have sold the dollar on the basis that the U.S. economy will come unstuck this year and some are betting on higher U.S. Treasury bond yields because they think the U.S. central bank is unlikely to halt interest rate rises at 5.0 percent in May.

They are active in commodity futures and emerging markets, which because of expected volatility, will offer opportunities on the downside as well as the upside.

"It's going to be a good year... because of the fact that the environment is right for there to be ample opportunities for skill-based investors," said Dawn Kendall, investment director at GAIM Advisors.

"Skilled-based investor" is the market euphemism for money-hungry scavenger.

Am I being too harsh? Nope.

Among vulture investors, one name is mentioned often with both envy and appreciation.

David Matlin has been averaging 40% returns annually since he started in 1994 running Credit Suisse First Boston's vulture fund. Okay, these returns aren't publicly available, but Matlin says his auditor Ernst & Young vouches for them. And few in the distressed-investing community are surprised by them. "I haven't seen actual returns, but that all fits together," says Thomas Cole, managing director at Deutsche Bank, which trades with distressed-debt scavengers.

Nevertheless, it's interesting to see them betting on the equity market to crash when for months everyone's been talking about the inevitable collapse of the derivatives market.