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Collapsing hedge funds add to temporary stock selling

Detroit Free Press – In our view, incessant selling is coming from the liquidation of hedge funds, and it is the new element in the securities markets that no one has experienced before.

This new source of selling has added to the normal amount of selling pressure generated by pessimistic investors, and in a confusing way. Hard information is tough to come by, but a better understanding can be achieved by arranging what we know.

In round numbers, the hedge fund industry peaked at some $1.6 trillion in assets. By the nature of the beast, that asset base is composed of trading strategies using stocks, bonds, options, futures, credit default swaps, you name it.

The funds are also leveraged 1.4 times as an industry average. So, $1.6 trillion becomes $2.25 trillion on a working basis. It is also to be noted that for every position in a trade, someone is on the other side of it. By definition, then, one part of the trade is right, and the other is wrong.

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