At the start of 2003, foreign investors held 33% of the ASX market capitalisation.
The hedge funds and "international hot money" became aware of the value buying in Australia and started buying big. This group started the bull market run from the trough of the current cycle.
By the end of 2004, foreign investors held 40% of the now increased market capitalisation of the ASX.
Hedge funds have extracted over $200 million of capital gains from the WMR (WMC) takeover play. This is at the expense of local investors.
Hedge funds sold some ASX shares in March 2005 and started the decline in the market.
What am I getting at?
Never underestimate the power of this group to move market pricing. I try to keep track of their movements as best as I can.
Currently, there are around 10,000 hedge funds (around 7,000 are American) across the world with assets estimated at around USD 1 trillion. They operate on huge leverage with the attendant financial risks. I forecast that some will collapse over the process of time when the next major dislocation in global financial markets occur.
Hedge funds thrive on volatility and exploit market mispricings or arbitrage.
Anyone wanting to know what happened when the most famous hedge fund in the world's history collapsed in 1998, can type in Long Term Capital Management (LTCM) on Google and read about the debacle. The Masters of the Universe that crashed down to earth. Alan Greenspan had to engineer a "cushion" to prevent contagion.