Any time a financial dealing is subject to side agreements, shell entities, or any other type of undisclosed arrangement, there is bound to be trouble waiting in the wings.
Hedge funds need an “edge” to trade profitably in these volatile markets. And with ever greater amounts of money chasing the same inefficiencies, any “edge” one has is eventually going to diminish. For a while the pundits have been saying that the growth in hedge funds was bound to turn, and when it did there would be hell to pay. If hedge funds’ growing use of “side pocket” accounts is any indication, that trouble may be just around the corner.
While one hedge fund might have seemed too big to fail, it did. There is nothing to suggest a lot of little ones can’t fail as well.