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It depends. If a hedge fund went bankrupt, the cash will go to investors who may be risk averse. If the hedge fund survives it will have significant losses an
by fractionalhare 6y ago
It depends.
If a hedge fund went bankrupt, the cash will go to investors who may be risk averse.
If the hedge fund survives it will have significant losses and probably be cagey about deploying a lot of capital again too quickly because it just stared into the face of death.
In the case of individual investors selling off everything, they might be scared because everything is crashing.
There's no rule that says the money will come back to the market quickly. It depends on investor sentiment. Often things have a V-shaped recovery and things are more or less "fine". We had a few of those over the past few years.
But put it to you this way, if this statement of yours:
It has to go somewhere, and so it will come back into securities in probably a few weeks or max, months. The value represented isn’t exactly disappearing it’s still in the ‘system’.
...was correct, then we wouldn't have crashes. But we do. When fear takes over the money doesn't just come back into the market quickly. And then even if it could, it doesn't because second order effects take over. Small businesses close en masse, etc, which magnifies the downturn until it snowballs into a legitimate recession.
I'm not saying a crash will happen because of this. I'm saying it very realistically can happen.
- smaddox 6y agoThere's also leverage/margin (i.e. borrowing to buy stocks). With higher volatility, investors might be less willing to use leverage, resulting in less total demand, which results in lower prices. When stocks drop, excess income and capitol drops, reducing demand in the wider market. Companies come under pressure to cut costs, and end up doing layoffs. This further lowers demand, resulting in a feedback loop. This is all described by Minsky's financial instability-hypothesis. And Steve Keen has built fully dynamic mathematical models that exhibit the process.
- codeisawesome 6y agoOkay - that begins to explain the problem a bit. So people being afraid and just holding on to their newfound gains in just cash or say, T-bills - can depress the entire economy by a lack of interest in stocks. Structurally it seems a little problematic though that companies would depend so much on issuing stock to fund their operations or even growth - ideally they should be able to do that with revenue (or even debt)...
- adolph 6y agoAlt hypothesis: Retail just learned a method of turning tables. Hedges will temper market moving short positions due to increased risk. Overall it’s a rebalance due to innovation.
- adolph 6y agoAlt alt hypothesis: smart hedges realized the overexposure while ago and wsb is schooling the dumb hedges who filled the vacuum. https://www.institutionalinvestor.com/article/b1q3cxqlbmltyl/The-World-s-Biggest-Short-Selling-Hedge-Fund-Is-Scaling-Back https://www.institutionalinvestor.com/article/b1q3cxqlbmltyl...