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Cramer’s Redemption Song

Thursday, 16 Aug 2007 | 10:56 AM ET

The massive sell-off that came as hedge funds scrambled to cover their client redemptions is most likely over for the month, Cramer said. But expect a fresh round come the beginning of September.

Redeeming Qualities
Mad Money host Jim Cramer takes a look at hedge fund redemptions, which are when hedge funds are forced to give money back to their investors.



“Our reprieve will not last long,” Cramer said. “I expect this whole mess will come right back at the end of August because the funds will still be down, and they'll know that even more clients will want redemptions when they see the next month's results.”

The same process that happened in August should happen again: At the beginning of the month, investors saw that hedge funds weren’t performing well. These investors asked for their money back. Hedge funds scrambled to raise the cash.

The value mismarkings on mortgaged-backed securities turned out to be a big problem for these funds. As Cramer explained tonight, because mortgage-backed bonds aren’t widely traded, holders were able to value the bonds at their discretion. It wasn’t until it came time to sell in an effort to raise cash that people found out just how little the bonds were worth. Then it looked like hedge funds had, all of a sudden, suffered huge losses, but Cramer said it had to do with the marks.

“There’s more pain to come,” Cramer said, “but opportunity too, as the good stuff gets thrown out with the bad.”

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