the hedge fund piledrive

working in the hedge fund industry is like swimming in a shark tank.

there seems to be a perception that hedge fund guys get together in a cabal and move markets.

the reality is most hedge funds don't talk to each other. if they did, they could be considered to be acting in concert and would have to consolidate their ownership positions thereby perhaps triggering a poison pill, violating a standstill agreement or other sort of deleterious situation.

however, one thing hedge funds do in relation to each other is try to pile drive suffering funds.

for example, let's say hedge fund A is suffering redemptions. then, necessarily, they need to sell off some of their positions in order to get the cash to fulfill the redemptions. typically the hedge fund will cash out of positions they don't particularly like.

what ends up happening is that other hedge funds, B and C, hear about this and begin shorting many if not all of the positions of A. the more B and C short A's positions, the more A's positions get stressed. investors in hedge fund A see the performance of A continuing downward and so they redeem more.

this creates a downward spiral for all of A's positions. and A, under stress has to continue to liquidate. this is not a lot different than creating a run on a bank. at the end of this process, the good positions of A have been pushed downward to a point where there is a lot of value. this dislocation provides opportunity for the savvy investor.