Is the Stock Market Decline Something to Worry About?

If you are the manager of a "hedge fund" be worried, be very worried. If you have invested in hedge funds that seek continuous annual returns greater than 15% on your investments then you should be worried. But for the overwhelming majority of small investors, the current slump in the market is temporary and should not be a major concern.

Hedge funds are private investment groups that are not subject to the government regulation that mutual fund companies must follow. They are involved in a variety of investments that attempt to leverage their money and thus exert more control over markets than the actual real dollar amount of their investment. The intent is to produce exceptionally high returns for their investors. Essentially, "the greater the risk, the higher the reward" axiom is their guide. The term "hedge" means that they are attempting to cover the high risk associated with high reward by seeking other less volatile investments to cover a portion of the risky venture. In other words, they try to hedge their bets.

Unfortunately, many of these hedge fund managers have become increasingly risk prone and have failed to sufficiently "hedge" their investments as they seek high returns. Many have invested in what is called the sub-prime lending market. Essentially, sub-prime lending refers to making loans to customers that have much less than a stellar line of credit. These customers are forced to borrow and pay a higher interest rate than most solid borrowers. Hence the return on a loan is higher.

Currently, attention is focused on the down-turn in the real estate market in the US. Real estate values has been enjoying unprecedented growth over the last decade and return to more normal annual increases in value have been long overdue. Here is where the the forces of the market have collided.