Riva Atlas at the New York Times reports that October was a bad month for hedge funds with a number of large, high profile funds taking significant losses:

Some large hedge fund managers are facing losses of 5 to 10 percent for the month, according to people briefed on the results. The losses may be tied in part to many funds selling their biggest winners at the same time, putting pressure on prices.

October, historically the cruelest month for investors, has been rocky. Despite a rally on Friday, the Standard & Poor’s 500-stock index is down more than 2 percent for the month, and Treasury yields have recently spiked. Comments by Federal Reserve officials early in the month set off fears of rising inflation, while crude oil prices have eased.

Yet hedge funds – private, lightly regulated pools of capital – are not supposed to ride the currents of the markets, but are intended to be “uncorrelated,â€? meaning they hope to produce returns that are superior to conventional investments. That is why wealthy investors and big institutions are willing to pay hedge fund managers hefty fees, typically a management fee of 1 to 2 percent and a 20 percent slice of the profits.

The disappointing results for October suggest the explosion in hedge fund growth has led too much money chasing too few investments. For example, a number of hedge fund managers followed the hedge fund star Edward S. Lampert into Sears, where he is also chairman. Sears is down 5.6 percent this month.

That indeed is the interesting question – whether hedge funds, as a whole, have too much money chasing too few anomalies. It would be surprising to see institutions that have only recently embraced hedge funds take a step back and net redeem interests in hedge funds. However an extended period of underperformance would put the hedge fund boom in question. As in most matters related to the market, only time will tell.

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