Prior to the recent golden era of program trading and hedge funds, value investing played a major role in the markets. In today's environment, stocks are largely at the mercy of large but nimble players who have the size and speed to slap stocks around in a matter of minutes or hours. The phenomenon of nontraditional forces determining prices is not restricted to stocks.
A 2007 study by the consulting firm Greenwich Associates found that the credit derivatives market -- the vast network of agreements and contracts that bet on debt -- now drives the pricing of the corporate bonds that underlie those derivatives, a development akin to the rabbit chasing the hound.
Money managers have complained this trend is making corporate bond prices more volatile. The study concludes: "In many ways, hedge funds have become the market."
The oncoming wave of regulation will take a very close look at the dynamics that led to last year's meltdown and the activity of hedge funds will likely be front and center. Based on the number of smaller buy-and-hold investors who were crushed last year, there will be a lot of pressure on regulators to reduce fast money's grip on the markets. Consequently, hedge funds are soon going to be in the precarious position of relying on the regulators' ability to distinguish between a new reality in the markets and outright abuse.
How Traders Killed Value Investing [WSJ]