Hubris, extreme leverage, and other people's money.
The Hedge Fund Implode-O-Meter (HFI) was created in mid-2007 amidst the ongoing collapse of the housing finance sector and a general credit crunch to track as hedge funds learn the double-edged-sword nature of the often-extreme leverage they use.
For a little background about what hedge funds are, take this definition from CMRA:
[A hedge fund is] Generally a pooled investment vehicle that is privately organized and administered by investment management professionals and not widely available to the public. Many hedge funds share a number of characteristics: they hold long and short positions, employ leverage to enhance returns, pay a performance or incentive fee to their hedge fund managers, have high minimum investment requirements, target absolute (rather than relative) returns and/or may be organized offshore. In addition, hedge funds are generally not constrained by legal limitations on their investment discretion and can adopt a variety of trading strategies. The hedge fund manager will often have his/her own capital (or that of his/her principals) invested in the hedge fund he/she manages.
However, we think iTulip's re-definition of hedge funds as "Unregulated Speculative Investment Pools" (USIPs) is more apropros these days.
Over the past few years, the number of hedge funds has grown significantly (some estimates put the number at 8,000, up from just a handful in the mid-90s, with $1-3 trillion in principal). Thanks to easy-money policies by central banks around the world, hedge funds have found their leveraged investments across all asset classes to be fruitful. In particular, the siren song of what may go down in history as the largest housing bubble in history, a bubble borne on the backs of "exotic" mortgage products and consumer debt, proved too tempting to pass up.
We think hedge funds have largely lost their way. Notably, most have abandoned capital-preservation for the goal of aggressive accumulation of capital gains, with the benefit of lax regulation and extreme leverage available to exploit (giving them an edge over mutual funds). But any elementary-level finance student will tell you that leverage is a double-edged sword. With mortgage-backed securities losing value daily and credit quickly evaporating, these funds that were flying so high are now finding out how leverage slices the other direction. HFI merely tracks as the heads roll.
Aaron Krowne founded the Mortgage Lender Implode-O-Meter at the start of 2007 to track as mortgage lenders went belly up on the back-end of a busted housing market. Due to the huge public interest in the MLI (and over 100 "imploded" lenders to date) and the resulting load of work, Aaron tapped Justin Owings, founder of autoDogmatic and graphical designer for autoDogmatic and ML (and "vice implodenator" there) to co-found Implode-Explode Heavy Industries, Inc., the parent company of the Hedge Fund Implode-O-Meter. Aside from fielding tips and community inquiries, replying to informants and compiling research on "imploded" funds and lenders, Aaron serves as the technological mastermind while Justin lends a hand with marketing and design, strategy, and finances.
The HFI exists to serve as an historical record of how a little hubris plus other people's money all raised to the power of leverage can lead to financial disaster. Whether you are an outsider or a seasoned fund manager, we hope you can learn something from this historical record of market implosion.
— Justin Owings and Aaron Krowne, for Implode-Explode Heavy Industries, Inc.
The Hedge Fund Implode-O-Meter is a property of Implode-Explode Heavy Industries, Inc., # 450, 5348 Vegas Drive Las Vegas, NV 89108