The Paulson Plan Ver. 2.0 has made more progress than its predecessor. This will undoubtedly lift spirits in the financial markets right now, though the long-term consequences on US debt and deficits can be quite serious.
But while there has been some temporary good news from Washington, it will also be worth keeping a close watch on what is happening in hedge fund offices around the world. Most hedge funds allow investors to take out their money at the beginning of each quarter. This week marks the start of a new quarter, and the instructions investors are giving to their hedge fund managers could help or further harm stock prices.
Hedge funds have had a terrible year so far. Most have reportedly been sitting on cash—to prepare for an avalanche of redemption requests this week. If investors pull out more money than expected, these leveraged funds could unleash a fresh selling wave in the global markets. But—who knows—if investors stay put, then these funds could deploy the cash they have to buy bonds and equities.
We’ll know soon which way hedge fund investors have actually voted.