04/18/2008 05:12 am ET Updated May 25, 2011

Why Hedge Funds Are Losing Money In Today's Market

Insight from Baruch:

The strategists at my beloved employer told the punters, correctly, that this year would see a lot of volatility in equities. So, they said, increase allocation to equity long short, which struck me as precisely the wrong thing to do. Paradoxically in times like this it is the dumb, directional money, the long only crowd, who can ride out volatility better.

This makes sense to me, and helps explain why volatility is bad for hedge funds. If you're doing any kind of relative-value play, then volatility works against you in that it increases the chances that you'll get stopped out before you make any profits. It's only the noise traders who really make money from volatility, and they're actually a minority in the hedge-fund world.

No hedge is perfect, and in periods of unusual volatility, hedges are more likely to fail.

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