Hedge Funds 101

There were a few lessons to be learned this week in hedge fund land.

Ospraie Fund, the world's largest commodity hedge fund, shut down on Tuesday. Ospraie and similar funds have in my opinion been big contributors to the volatility in the commodity markets over the last two years. I have said before that I don't even think that commodities are an asset class, they're just stuff with a clearing price set by the market, but hedge funds can go wherever they like so whatever.

Ospraie, which ran about $10 billion earlier in the year (according to some reports, I don't know) , was down to $4 billion by the end of August having lost more than 25% of its assets in August alone.

Lesson 1: If too many folks are doing it, it's going to be really wrong when it goes wrong. The long commodities, short stocks/dollar trade was very crowded.

Lesson 2: Narrowly-focused hedge funds that use leverage carry a level of risk that is unquantifiable until things go bad.

Lesson 3: If you own a hedge fund that has a bad quarter, you might as well sell. Now with this fund shutting down, investors have been told that it may take 3 years for all the money to be returned.

Be careful out there.