As are readers know, the SEC recently opened an investigation into the role that short sellers played in the collapse of Bear Sterns. There are various allegation of misconduct, including the allegation that some hedge funds flooded the market with offers to sell short in an orchestrated effort to drive Bear's stock price down.
Interestingly, a recent article by Jim Cramer suggests that pension funds may have played an unintentional role in the story. According to Cramer, pension funds may have invested in the same hedge funds that were engaged in this practice and " it isn’t clear that the pension-fund managers themselves know the havoc they are sowing with these hedge-fund doles. " Cramer goes on to suggest that "the custodians of workers’ pensions may not like the idea that they are instrumental in workers’ losing their jobs."
We're not taking a position on whether Bear deserved to get crushed or whether hedge funds were to blame. This story does remind us, however, that the world in which hedge funds operate is very secretive and that investors are provided very little information about what those funds are doing. When hedge fund returns are good, this lack of transparency doesn't seem to matter much. When times get tough, however, investors are likely to demand more and more information about what is being done with their money.
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