Hedge fund apocalypse? ... Not

Stop worrying about hedge funds already. You know what I mean. The deep, deep dread that they will somehow wreck the market for the rest of us.

Over the years I have been in the grips of that dread. I'd lie awake at night thinking about Long Term Capital Management, the hedge fund that nearly brought down all the world's markets in 1998 on a bad bond bet. But, despite the scare, hedge funds kept growing and are popping up in other sectors. They make real estate bets. They lend money. And, most recently, they're making commodity plays.

Yes, close the doors, they're coming throught the windows, they're everywhere. And there are a lot of them. And that's exactly why I've stopped worrying. There are so many of them in so many different areas, no single one is likely to rock the boat. And they are cannibals ... one of them trips, the rest of them eat the loser up. Look at Amaranth. It's holdings were gobbled up as it tried to weather its $6 billion face-plant.

Some people think hedge funds are rocking the boat in the Dow now, pushing money into big caps after parking cash in the oil sector for a while hoping for hurricanes to boost prices. But could one fund rock the market itself? Seems unlikely as time passes and the number of funds grows. Eventually the hedge fund sector will just be a smaller version of the investing public at large.

Maybe hedge funds can rock some niche markets big time ... but so could any big investor. And there will be scandals, like Bayou, and failure, like Amaranth. That's dangerous for the wealthy people who feed the hedge funds. More important for the average investor, there have been reports that some hedge funds may be trading stocks based on inside info gleaned from their newfound lending activities. And there are some worries in Congress that pension funds may be investing in hedge funds without appreciating the risks involved.

Serious problems, yes, but not the Apocalypse I've been dreading. I'm done with that. Now I'm trying to figure out where all the funds will stampede next. That's where the money will be made.

http://money.cnn.com/2006/10/26/commentary/wastler/index.htm?postversion=2006102617