Hedge funds have decided to curtail their risks. That means no reward. The reason for putting money into hedge funds, big upside for investors, may be going away.
According to the FT, "Citigroup estimates that hedge funds have now placed $600bn in cash, and that $100bn of this is held in money market funds." These large investment firms do not want to be crushed by the current credit crisis.
The hedge funds are making a mistake by turning away from their charters to use leverage and chancy tactics to make money, even it the odds have become extraordinarily higher.
Distressed assets could become the next great wave of money-making investments. Even the Treasury thinks so. It is telling Congress it can make money on the toxic assets it is buying from banks. Those financial instruments may come back with improvements in the housing and mortgage markets.
The banking market is also awash with corporate IPO debt which often sells for 80% of its face value. Some of these investments will fall apart, but most of the companies are likely to be fine coming out of a recession.
Hedge funds are turning their backs on what may make them extraordinary money machines during a time when potential rewards are reaching a peak.
Douglas A. McIntyre is an editor at 24/7 Wall St.
