Three Investments That
Will Crash
By Graham Summers
February 22, 2007
Since the current bull run began in 2003, we've seen the boom of several investment vehicles. Most notably, there has been a rush in...
1. Hedge funds
2. ETFs
3. Private-equity deals
All three of these investments have been flooded with speculative money. And when the market finally corrects, all three will be hit hard as the weak hands panic and pull out. The damage could dwarf last May's correction. Let me explain…
Hedge funds were created to "hedge" against market corrections by establishing both long and short positions simultaneously. These investments have been around for decades, but they've exploded in popularity in the last three years.
By the middle of last year, hedge funds managed more than $1.4 trillion in assets, according to Hedge Fund Research. That's a 19% increase from 2005, and nearly a double since 2003. There are currently nearly 9,000 hedge funds in existence.
We've reached a point where plenty of people who shouldn't have money in hedge funds, do. The Wall Street Journal reported hedge funds account for roughly 30% of the trading volume in the market.
As soon as the market correction hits, money will come flying out of the hedge-fund industry. Smaller, less-established outfits will have to liquidate.
Exchange-traded funds, or ETFs, on the other hand, are essentially baskets of stocks created to track various indexes. Originally, these were used to follow some of the larger, more popular sectors, such as energy. However, at this point, there are ETFs that follow even peripheral sectors, such as water or alternative energy.
According to State Street Global Advisors, U.S.-based ETF assets increased 38% from 2005 to 2006. And there are plans to nearly double the number of ETFs to 359. If there's a downturn, the peripheral players here will disappear almost overnight.
Finally, private-equity deals have hit bubble proportions. In 2006, private equity firms raised $316 billion: an all-time high, second only to 2000 with $306 billion. When the tech bubble crashed, private equity funding fell 90%. And during the market corrections last spring, private-equity funding nearly halved.
The long-term trend in private equity may be positive, but the money involved is clearly speculative. You can imagine what will happen this time when the market slips and the speculators head for the hills.
If you have money in any of these three investment vehicles, now is the time to reconsider your position. Are you in a peripheral player... or something that could handle a serious hit?
Good trading,
Graham
