Hedge funds take money from investors and make risky investments. They magnify the risk by borrowing short term funds. Some hedge funds borrow 20 times of their capital. This high leveraging is dangerous.
When their risky investments turn bad, they lost most of their investor's capital. They are not able to refinance the borrowings and had to repay them at short notice. They are required to liquidate their assets at depressed prices.
A few hedge funds had failed in this manner in recent months. This has caused the turmoil in the markets. It has become a financial crisis.
Lesson: Expect some regulatory controls over the use of leveraging by hedge funds in the future. In the meantime, expect the market to go through a lot of further turmoil, until the liquidity crisis is sorted out.
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