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Hedge funds continue to hit the buffers as confidence disappears

In light of the Madoff affair we are seeing a number of worldwide hedge funds come under serious pressure as investors run for the hills. While hedge funds are often associated with high risk investment this is not always the case but they all seem to be tarred with the same brush and the sector as a whole is suffering from substantial withdrawal demands and very low confidence. Indeed, many now believe that in light of the Madoff scandal we will see a substantial cooling of demand for hedge funds in the short to medium term.

The problem which many funds are experiencing is in relation to their substantial borrowings against investor funds used to take large gambles in various markets. This means that a substantial withdrawal of investor capital places pressure on their banking covenants and in some cases a suspension of an investor's option to sell units. The more investors who are unable to gain access to their funds the larger the problem becomes and confidence falls yet further.

While hedge funds may well reappear in the future under a different guise, the short-term outlook is very unsettling and unfortunate because many well-run funds have been caught up in the problems concerning a small number.

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