Hedge Fund Pain Sends Stocks on Wild Ride

The sharp market declines on Wednesday that were exacerbated by rumors of poor performance at a leading hedge fund may only be the tip of the iceberg, as heavily leveraged funds are forced to liquidate more assets.

The Dow Jones Industrial Average plunged 733 points Wednesday as reports circulated that a key fund run by Citadel Investments, a large, Chicago-based hedge fund, was down more than 30%. Citadel acted quickly to dispel the rumors, but acknowledged that challenging market conditions last month had led to the worst performance in its history.

Wednesday's decline was the latest in a series of enormous dips and peaks in the market, as it has swung wildly on uncertainty about underlying fundamentals. But deleveraging, short squeezes and automated trades have also come to play a huge role in exacerbating gains and losses. Hedge funds that use borrowed money to amplify their bets and byzantine derivative investments to offset losses are contributing mightily to the off-the-charts volatility. ...