Hedge Funds & Private Equity & Bears! Oh My!

First it was the sovereign wealth funds, controlling vast portions of American companies. Then it was the private equity cowboys who came in and took public companies private, removing them from public investment – and scrutiny.

Finally, there were the hedge funds, large pools of private money moving the markets and making stunning returns at the expense of small investors.

Just like their predecessors, who have found that they aren’t as invincible as once believed, hedge funds are having a difficult year. Seven percent of all hedge funds closed in the first three quarters of 2008 – nearly 700 of them. That doesn’t even include the fourth quarter.

But don’t believe for a second that the Wall Street machine is broken beyond repair – far from it. You need only look at Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) consolidating their forces and combining their brokerages.

That doesn’t mean that we aren’t in for another quarter (or two) of significant pressures and negative earnings reports. Alcoa (NYSE: AA) kicked off earnings season off with a $1.19 billion loss. And even though this shocked very few on Wall Street, it still sent markets down.

It’s a strong indicator that sideways, or slightly positive movement in the indexes this year could be the only thing we have waiting for us somewhere over the rainbow.

Companies mentioned in this article: C, MS and AA.

• Citigroup Gets Treasury “Seal of Approval”
• Crazy Pills on Wall Street
• Earnings Optimism Hides Ugly Truth

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