Kass: Hedgies Get Their Comeuppance

In 2007, I warned about the consequences and the volatility that would follow the unwind and disintermediation of the hedge fund industry.

In January 2008, in my surprises list for 2008, I further discussed the liquidation scenario that is now ever-present:

17. The hedge fund community (especially of a quant kind) is disintermediated in 2008. Outflows accelerate, abetting an already conspicuous trend of rising volatility in a market that behaves more like a commodity than ever.

-- Doug Kass (January 5, 2008)

Finally, yesterday I discussed the same in the Wall Street Journal and on RealMoney Silver.

The Dukes traded in orange juice; the hedge funds had an overzealous love affair for materials/energy stocks and commodities. Both took their markets higher until the music stopped (for the movie's orange market, 25 years ago; for stocks, several months ago).

Over the last few days, the panic in the hedge fund industry has become as thick as the fog rising from Shinneock Bay in the Hamptons this morning. Fear of rising losses and redemptions (especially of a fund of fund kind) has many opportunistic hedge funds sitting on their hands in a buyers strike as those that are levered are being forced to sell.

What we are now experiencing is not only a flight to quality (into Treasuries) but a flight period -- that is, an unwind out of stocks, out of the carry trade, out of commodities, etc. -- and for many investors/traders, they are out of luck.

As I suggested (albeit prematurely) yesterday, this is the sort of capitulation that always marks a market bottom.

As it is said, it is always darkest before the dawn, as it was for bank stocks on July 14, 2008.

I suspect that the smart and liquid investors, like Berkshire Hathaway's (BRK.A Quote) Warren Buffett, though not yet visible, are likely committing serious monies on the other side of this week's liquidations or are getting their ducks in a row to buy in order to capitalize on Mr. Market's sale. They will be greedy when others are fearful, and, in the fullness of time, they will likely record outsized gains out of today's carnage.

But for now, as the Duke brother screamed, "Where's Wilson (the hedge funds)?"

They are selling Mortimer.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, please click here.