Cramer's 'Mad Money' Recap: The Power of Hedge Funds (Final)

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NEW YORK (TheStreet) -- "Today's market action wasn't because of China's soft landing," an upbeat Jim Cramer told the viewers of his "Mad Money" TV show Thursday, "it was because hedge funds overreacted to the news."

In a inside look into the minds of big money managers, Cramer said after running a hedge fund himself for many years, he knows how these guys think. "They all run off the same playbook," he said, and are under constant pressure to make money. That pressure, in turn, means fund managers must react daily, sometimes hourly, to the news of the day.

Cramer explained that in 2008, hedge funds were all betting on the rise of commodities like oil and copper, thanks in large part to an insatiable appetite for these items from China. When China's economy topped out, these funds were all caught off guard, said Cramer, and with margin and redemption calls looming, the hedge funds cashed out hard.

In 2009, Cramer said the Chinese stimulus kicked in, and the hedge funds came roaring into the same stocks they fled in 2008. This move back into the markets helped send the Dow from 6,500 back to 11,000, said Cramer, led by the oils, banks and technology.

However three months ago, Cramer said China realized its stimulus was out of control and hit the brakes. Just as before, the hedge funds once again sold everything, sending the markets lower.

But now, just four days ago, news that Chinese imports and exports are up, caused the hedge funds to again change course and roll back into the market.

Cramer said the fundamentals of individual stocks certainly do matter, but the movements of hedge funds, which are amplified by margin buying and the new double and triple levered ETFs, can put tremendous pressure on the markets. Cramer said a single fund managing $500 million can now control as much as $2.25 billion worth of stock, and that moves markets.

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