ABC News’ Bianna Golodryga reports: What's behind these huge market swings? Pay attention to who’s driving the action. One major industry to look at -- hedge funds.
It is a $2.6 trillion industry and it’s not rich "fat cats" money. Pension funds are major clients as well. Hedge funds are in a tough bind right now. As one major fund manager said when futures were reacting positively to news of the rate cut this morning, "Today not a soul is expecting a market turn to hold."
Hedge funds are at their lowest level in more than 20 years. Most hedge funds have been facing frantic massive redemption from clients during the last three months and are being forced to sell what had been winners. Big commodity-based companies -- those that have seen huge spikes in stock values -- are taking massive hits on renewed concerns of a global slowdown.
Hedge fund average returns fell nearly 5 percent last month -- the biggest loss in 10 years. Year to date, they are down nearly 10 percent. Most of these managers charge a high fee, 2 percent annual management fee, a 20 percent cut for any profits. Seeing as they have only 2 1/2 months left in the year to prove themselves, the clock is ticking. One analyst predicts that 10 percent of the 10,000 hedge funds in business may be gone by early next year due to investor liquidation.
This morning they were carefully watching the market's reaction to news of the rate cut. Had they seen a sustainable positive response, they would have been covering their bets. Because the underlying view was that this rate cut did not have legs, hedge fund investors turned back toward their redemption spree. If they sense a turn in sentiment, they will start covering up their shorts as quickly as they sold them off. Their actions will likely be quick, fast and seemingly irrational.