Financial News Online US- “Speak softly but carry a big stick,†was the West African proverb adopted by former US president Theodore Roosevelt. It could be the motto of the hedge fund industry. While most keep a low profile they have made a big impact on capital markets.
There is evidence their trading strategies have dampened volatility and increased price correlation between assets, so prices move up and down together. If and when this situation reverses, many funds may be in for a shock.
Given their influence on markets, the stick being wielded by hedge funds is small. Ignoring leverage, hedge funds account for 1% of global financial assets, and up to 4% if borrowing is included. Yet they account for more than 50% of daily turnover in London and New York-listed equities and 60% of credit derivative volumes.
And it seems funds are increasingly taking similar bets. The correlation between strategies has risen from 30% to 40% in mid-2003 to 80% to 90%, according to the European Central Bank. With managers finding it more difficult to make money, they are herding around opportunities.
