Having predicted market turbulence in my posts of 11th May, 7th June and 27th July based on the perfomance of the VIX, the collapse in the markets is now being laid firmly at the door of the hedge funds. This to me is ironic, as the whole point of a hedge fund is to hedge risk. According to the market experts the so called ‘hedge funds’ have just been long the markets, like eveyone else!!!! The whole point of a hedge fund is to hedge risk, and to play both sides of the market. This only goes to prove that investors have no idea what fund managers do, and that fund managers have less of an idea than the investors.
The net effect of the above is that the banks are panicking with a credit freeze, and within the space of two weeks, the econimies of the world are now talking about rate cuts and slow down!! – amazing. Warren Buffet warned recently that no-one would know what would be the cause of a mjor sell off, until after the event – much like the shooting of the Archduke Ferdinand which started World War One. He also added that we would be facing many more years of turbulance, becasue of the problems with derivates and margin ( until recently money was cheap). All derivatives are underpinned by leveraged trading using margin ( borrowed money!!)
My own belief is twofold. Firstly the market makers have enjoyed a long bull run, and have used the sub prime news as an excuse to frighten the markets into a major sell of, so that they can pick up cheap stocks for the next bull period. Secondly, everyone should have seen it coming – you only have to look at the VIX, it was far too low at 9/10. The opposite is now true with it approaching 30 in the space of a week – if you are brave enough, with everyone else selling, now is the time to start thinking about buying.