Financial News Online raised an interesting point when it reported that, by one measure, about 30 percent of hedge funds engage in some form of smoothing that can reduce their volatility. The issue is how to value certain securities that are very illiquid. We've touched on this in the Bear Stearns near-fiasco. At first, the firm said the losses were in the 6.5 percent range. Three weeks later, the losses were restated to 19 percent. It's a bit of a mystery how specific funds and banks actually value the subprime debt they hold. At some point, it may all have to be somehow given a realistic value. Hopefully, that will take place in a somewhat orderly fashion. But for hedge funds, all it takes is a wave of redemptions for managers to be forced to grapple with these issues. You have to assume that the value of subprime debt in many hedge fund portfolios perhaps is not completely in synch with reality.

For more:
- here's the article from Financial News Online