As insurance companies, banks, and endowments continue to scale back hedge fund investments, a new survey from Barclays finds that pension plans and wealthy families may be increasing their investments. Such investors have about 14 percent of their assets in cash, with almost 80 percent of this group planning to allocated money to hedge funds during 2009 (see Bloomberg article). With pension plans having around $437 billion in assets, and wealthy families controlling another $72 billion, potential investments could result in over $50 billion being added to hedge funds this year. While $50 billion is not anyway near current Government spending levels, it is certainly enough to generate its own form of market stimulus, adding additional buying pressure as the major indexes continue to flirt with key levels.

Andrew Lo, the director of the MIT Laboratory for Financial Engineering, and founder of the AlphaSimplex hedge fund, believes the next big meltdown will be in commercial mortgages (see Reuters article). While many traders and investors have been predicting that the CMBS market would be the next one to take a hit after blowups in the residential market, Lo is predicting that the losses will accelerate later this year as rates begin to be reset higher. Also of note is how Lo believes that it will be pension funds, and not the banks, that will be hurt the most when commercial real estate comes under additional pressure. In an effort to increase yield when the markets were more static, pension funds loaded up on CMBS in the years before the market meltdown. There is an expectation that many pension funds will now have a difficult time meeting liabilities, forcing the government to once again step-in with some type of bailout. While this is certainly not good news for the economy if the commercial real estate market was to play out as predicted by Lo, given the hits commercial real estate has already taken, the pressure pension funds are already under, and the number of bailouts which have already occurred, it is difficult to know - even in general terms - what the reaction and impact on the markets will be. Maybe this is the saddest realization of all.

The Alternative Investment Management Association (AIMA), an international trade body for the hedge fund industry, is reporting that an absolute majority of all assets under management by hedge funds and funds-of-funds are held by institutional investors. In addition, a third of those assets from institutional investors now come from pension funds. While the AIMA has some interest in promoting hedge funds and other alternative investments, the breakdown does highlight how a growing number of institutional investors, including pension funds, university endowments, and foundations that are invested in alternative investments, with the numbers growing each year. While there is certainly reason for individual investors and those on "main street" to be upset with some of what has been happening on Wall Street, using a blanket approach of penalizing all of Wall Street could have unintended consequences for individual pensions and those charitable and cultural activities often sponsored by endowments. Saying that "what is good for wall street is no longer good for main street," to paraphrase some in Washington, could be bad for the average citizen if actions begin to match the rhetoric.

Commodity index investors (ie, speculators) sold $39 billion worth of crude oil futures between the July market peaks and September 2nd, a time that saw a rapid sell-off in crude oil prices (see Independend.ie article). The analysis was once again done my Michael Masters, president of Masters Capital Management, who recently blamed speculators for driving up prices. The drop also comes at time when the IEA is forecasting lower demand, and pension and hedge funds are unwinding commodity positions, each of which have put pressure on prices. In the end, such debate may be academic as to whether we call those selling speculators (be it hedge funds, pension funds, index funds, or individual traders). Given the exposure we all have to pensions and index funds (even us retail money mortals), we all might be classified as speculators, notwithstanding the evil mustache-twisting monopoly banker image. Of course, all this talk says nothing as for whether speculators are even inherently bad for the markets in whole (see US News & World Report blog). After all, who is going to take the other side of the position when a company is looking to hedge its risk? If the market is rising or falling, will there always be the perfect number of textbook farmers and bakers on the other side of the wheat contract? Probably not. How many companies will show higher profits, or at least less loss, due to placing proper hedges? Raising margins to decrease leverage and unhealthy exposure is one thing, but making it more difficult for the market to even function is another. If we eliminate all trades and traders that don't actually plan to buy or sell the commodity, liquidity will decrease. If this does happen, individuals may find themselves living in a much riskier world, even if the price of crude seems a little less volatile day-to-day.