Word: price
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...learning a whole series of lessons now, like you don't want to create shadow banking systems without enough capital. The idea that we should do nothing about bubbles because of this Greenspan notion that we can never figure out the difference between an asset-price increase that is fundamentally driven vs. one that's a bubble, I think, has been completely discredited. Everyone now says we should act preemptively against bubbles...
...comes the murkier part: Many assets - particularly those that unregulated hedge funds can trade - are not as liquid as stocks, so they do not always have a definite price on the market. Since a fund reports unrealized gains, it could easily get away with inflating profits. More specifically, the fund could use the most optimistic models to price its illiquid assets, which include mortgage-backed securities and other swaps. After all, economists disagree about how to value these assets, so the fund is not necessarily being dishonest in its assessment...
Even in the most vanilla of trades, liquidation can impact the market price. With lightly traded securities, this can be magnified. For example, a fund might corner some asset by buying and buying and buying and then reporting a huge unrealized gain. But the moment the fund tries to sell and realize the gain (perhaps to pay off its last few investors), demand disappears, and the asset crashes. Again, investors withdrawing early got better returns over that time period than those who waited until later. (See the top 10 financial collapses...
...design, hedge funds benefit managers more than investors. Since the liquidation of assets always results in slippage - the more that is sold, the worse the price - managers for every hedge fund always get the "best" 20% of the profit...
...Index, a key measurement of domestic production, hit a 28-year low in December. Payrolls fell an additional half million last month, leading economists to predict that the total job losses in 2008 were greater than at any point since the immediate aftermath of World War II. The housing-price free fall has yet to show any clear sign of stabilization...