The current market is one in which "both hedge funds and dealers have de-risked as much as possible, with the end result that liquidity is really awful. It is not representative of anything behaving well."

So says one expert in the Financial Times. Now, we often hear the old saw that volatility is raw meat waving in front of hedge funds, which like to claim that they can make money when markets rise, fall or remain in trading range. But the reality is more complex. And that sort of rhetoric has to be taken with a grain of salt.

This highlights to some degree the difficulty hedge funds have in shorting the market. If you really want to hedge your long equity bets, you are going to have put up some capital. It ends up being really expensive in some cases, a lesson learned by many a corporate treasurer who got burned by trying to hedge against various commodity or other prices. We've noted that there is a fine line between a hedge and a massive downside directional bet. If the hedge or bet is large enough, you could get burned if it doesn't work out.

No one should be surprised that hedging difficulties right now are pushing some hedge funds to the sidelines. In addition, "many hedge funds have turned to exchange traded funds, which are liquid and relatively cheap to trade, as a means to hedge their existing exposure and express an bearish investment view," the FT notes.

For more:
- here's the article

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