Out of the thousands of hedge funds in existence, hundreds are closing up shop and liquidating, if the past weeks’ trading action was any indication.

Many of these hedge funds should never have been started to begin with, because their illusory gains during the credit bubble were too often made with leverage, rather than analytical talent.

The Good with the Bad and the Ugly

Yet their demise hurts anyone trying to manage an investment portfolio in a prudent manner — similar to how Bear Stearns and Lehman Brothers permanently stained the entire investment banking industry.

It’s a case of a few bad apples spoiling the whole barrel. Unfortunately, it remains to be seen how regulators and politicians will punish every investor, including those who have acted prudently.

For example, I just read a publicly released copy of a letter dated Oct. 2, sent from the U.S. Congress to Harbinger Capital Partners. It asks Phil Falcone of Harbinger Capital to reveal practically everything that’s confidential about his funds and to testify before a committee. Let’s hope U.S. regulators don’t take action to drive even more investment talent overseas, because we need them here to help keep our markets efficient.

The Baby’s Bathwater

It amazes me how long this environment of panic has lasted. Quality companies in the oil services, coal, steel, and agriculture sectors were liquidated in violent fashion — many of them down 20% in a day and 50% over the past month. These are real companies performing vital functions necessary to keep the lights on and food on shelves, not speculative Internet stocks.

The list of victims includes companies that are very likely to deliver good earnings over the next few years.  There are some screaming bargains out there — unless, of course, half of the world’s population stops using food, electricity, and oil. I doubt that will happen in a world of unfettered deficits and central banks, but anything’s possible.

Regards,
Dan Amoss

October 17, 2008

P.S.: That’s what my colleagues at Penny Stock Fortunes are looking for. Their most recent issue includes one of the cheapest, yet lucrative, penny oil plays I’ve ever seen.

Dan Amoss has prepared a free Retirement Recovery Webinar to help you survive and prosper in this insane market. It will explain how we got in this mess, where we are now, and give you valuable specific action plans to help you profit for your future. It’s free and it’s easy to watch — you don’t need any special software — you can watch it right on the same computer you use right now.

Leverage Proves Fatal as the Credit Crunch Tightens was originally featured in the Penny Sleuth.