Echoing predictions of a coming hedge fund massacre, bond giant Pimco’s Mohamed El-Erian said Friday that some of these hedge fund managers need to "sell and get out of the way."
Once the hedges capitulate, stocks will fall to a sustainable level, he said. The Dow opened Friday down 430 points before recovering ground by midday trading.
"It's ugly, it's messy ... but that's the reality when you have a system that is damaged. As it recovers it has to get rid of the damaged parts," El-Erian said in an interview with CNBC.
There are thousands of hedge funds, many of them small operations run by relatively inexperienced young traders who got into the business during the recent, five-year stock boom.
Clearing out that deadwood is a big part of cleaning up the markets.
El-Erian sees the market trying to establish a floor, after which he says the actual recession will matter more than the ongoing panic.
"We're getting close to the point where the market will finish repricing. Today we're going to take a major step toward that, but you don't reprice until you get rid of the damage," El-Erian said.
Former Clinton adviser Nouriel Roubini said earlier that he expects an emergency market shutdown amid a “massive dumping of assets” as the weaker hedge funds are flushed out.
Roubini believes hundreds of hedge funds will fail and that policymakers might have to shut down financial markets for a week or more in response.
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