Are the hedge fund runs the modern day equivalent of the bank runs of the 1930's or even the Panic of 1907?
That is not as glib an observation as you might think at first. The hedge funds like Citadel and Fortress resemble the private banks of New York in the early 1900's in many ways.
As in the case of Bernie Maddow, as a type of Richard Whitney, we're seeing echoes of certain periods in the past in many of the events today.
This is clearly not your father's recession, but we are not quite sure what it will be yet, and are often unpersuaded by those who think they do.
"Why can't you just accept that this is deflation?" It is clearly a deflation in terms of aggregate demand, no question. All one has to do is look at GDP. But we do not see it as a true straightforward money deflation with a sustainable increase in the value of the dollar. The dollar is a financial asset and not a store of value. It is an artifice.
Something is going to replace the dollar, but we cannot tell what it will be yet.
The Fed and Treasury have given away three trillion dollars at least so far, with commitments to give away five more. It only seems to be a deflation if you are not on the list of the chosen few, and take a shower before leaving for work instead of after. In the short term deleveraged cash is king, no doubt about it. Risk is still high, and we have much further to do to the downside. Stocks are poison and debt is unstable.
The dollar is decoupled from reality, far from the conventional mechanisms of savings and investment. Its all policy now in the short term, and then the next phase of this transformation will begin, and it will contain a surprisingly large portion of the unexpected, the unanticipated, on the order of the stagflation of the 1970's that left so many economists with their mouths gaping open.
The natural question is "But Jesse, this is all well and good, and it makes my head hurt. What is the endgame? Where should I put my money now?"
Cash. The safer stores of value of wealth. Its no coincidence that short term Treasuries have spiked to negative returns, and manageable forms of gold and silver bullion are in scarce supply. And then we wait and see what happens next. Take risks if you must, but only with a very small percentage of your portfolio, and sit on the rest, get out of debt, cut consumption, and wait.
There is no way to adequately measure and assess risk in a system in which the price discovery mechanisms are broken, and the standards of value are changing to something radically different, and success and failure can rely on the somewhat arbitrary policy decisions of a few politicians and bankers and the decisions of foreign governments.
Citadel Suspends Withdrawals in Two Hedge Funds After 50% Drop
By Saijel Kishan and Katherine Burton
Dec. 12 (Bloomberg) -- Citadel Investment Group LLC, the Chicago-based hedge-fund firm run by Kenneth Griffin, halted year- end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, according to a letter sent to clients.
The Kensington and Wellington funds, which together manage about $10 billion, have lost 49.5 percent of their value this year through Dec. 5. Withdrawals may resume as early as March 31, said the letter, signed by Griffin and sent to investors today.
“We have not made this decision lightly,” Griffin wrote. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet.”
Citadel joins hedge funds including Fortress Investment Group LLC and Tudor Investment Corp. in limiting withdrawals as hedge funds head for their biggest annual losses since at least 1990. Hedge funds have declined 18 percent, on average, this year through Nov. 30, according to Chicago-based Hedge Fund Research Inc.
As of October, 18 percent of hedge-fund assets, or about $300 billion, managed by 5 percent of hedge funds, were subject to some sort of restriction on withdrawals, according to Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte.
Citadel normally allows clients to withdraw up to 1/16th of their assets quarterly. If total withdrawals exceed 3 percent of the fund, investors must pay a fee back into the fund ranging from 5 percent to 9 percent. Redemptions have never before surpassed the limit.
Citadel will also absorb “a substantial portion” of the funds’ expenses this year, the letter said. Citadel clients usually pay these charges, which have traditionally amounted to about 3 percent to 4 percent of assets.
The fund is holding between 25 percent and 30 percent of its assets in cash.
Katie Spring, a spokeswoman for Chicago-based Citadel, declined to comment.
Before 2008, Citadel had posted just one losing year since Griffin started the firm in 1990, dropping 4 percent in 1994. Three Citadel funds, whose returns are tied to the firm’s market- making business, have climbed about 40 percent this year. Those funds manage about $3 billion.