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Hedge Fund Managers: Drowning in 'Liquidity'

If there were an official buzzword of the Skybridge Alternatives Conference, it might be "liquidity."

Hedge fund king Ken Griffin, who runs Citadel, must have used the word a dozen times yesterday in his presentation. Countless other hedge fund managers have also mentioned their preference for liquid assets.

"We learned from the last crash that our investors favor liquidity," a manager of a prominent hedge fund told me. (Most people at the conference are not comfortable speaking on the record.)

Of course, this much unanimity has the contrarians itching to put on the opposite trade. If liquid assets are so popular, perhaps illiquid assets are available on the cheap.

"Look. Right now I'm trying to think what illiquid assets these guys might be overlooking," a manager of a small fund told CNBC.

According to the hedge fund manager, who asked that I not use his name, the "liquidity trade" has become too crowded. Hedge funds are paying a premium for liquidity, leaving lots of less liquid assets undervalued. He also believes that the preference for liquidity is driving the recent market volatility.

"When these big guys are loaded up with liquid S&P stocks, it makes the market climb. When they need to de-risk, they sell the most liquid assets—those same S&P stocks. So you get this incredible climb in stocks followed by wild sell-offs like we saw the other week," he said.

In fact, if there were two official buzzwords at the conference, the second might be "de-risking." Nearly every fund manger on a conference panel has mentioned de-risking.

So if the contrarian manger is right, we should expecta lot more volatility.

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