I don't think that the growth in hedge funds is itself a bubble. Hedge funds deploy capital speculatively into financial assets. They use complex instruments to profit from arbitrage. This should have the effect of making bubbles less likely, smoothing prices of assets by their ability to bet in the opposite direction from the rest of the market. However, given the growth of hedge funds there are fewer opportunities for huge profits and many hedge funds are betting on the same thing. This herd mentality can have the effect of inflating bubbles elsewhere. Another important element is that financial regulation - which is supposed to promote financial stability by limiting the ability of financial institutions to take big bets - often promotes herd activity. Financial market risk is assessed by VaR - Value at Risk - which measures risk of loss. The almost universal adoption of this measure means that if there are unusual market movements, then all financial institutions with VaR exposure will have to move in the same direction to keep within their limits. This might happen, for example, if the mortgage-backed securities market became more volatile on house price fears. James Greenstein (New to list - I am a risk manager in a large multinational bank.) --- "Patrick Bond" wrote: ----- Original Message ----- From: "Marvin Gandall" > ------------------------------ > (From today's Financial Times, a caution directed at both the Austrian > school on the right and the Marxist left who are again anticipating the > popping of the latest bubble -- this time,in US real estate -- will result > in a financial crisis and depression. The right looks to such "creative > destruction" as a necessary condition for regenerating capitalism; the left, > for the development of a mass movement aimed at its overthrow. Keynesians > like Posen expect the fallout to be managed and contained - again.) > Bubbles are getting blown out of all proportion > By Adam Posen > Financial Times > September 7 2004 Marvin, isn't the latest bubble - the massive increase in global hedge financing, according to the new BIS report - even more worrying? Some of Bloomberg's talking heads even attribute the oil price hike to herd trading... ___________________________________ http://mailman.lbo-talk.org/mailman/listinfo/lbo-talk