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Where hedge funds fit into the market ecosystem

Reprinted with the kind permission of Dr. Victor Niederhoffer from his book The Education of A Speculator. Thanks Vic!

Model 1: The Ecology of Markets

A System Diagram of the Major Market Relations.

The Market Ecosystem

In The Education of a Speculator, Victor Niederhoffer proposes that "... each futures and foreign exchange market is held together by a web of public, dealer, large speculator, and broker players interacting with each other and their market environment" (Niederhoffer 355).

Key Points:

  • The public & gov., in the form of losses, provide food & energy.
  • Herbivores= investment brokers & banks
  • Carnivores= large hedge funds such as Quantum, Tiger and Omega.

    "At each step, the orders and volatility are broken down into manageable slices and recycled among the participants in the web by decomposer species such as floor traders and telephone brokers" (355).

    *The Publics are typically futures traders, stock flippers, market timers, systems clubs and tape watchers, but Niederhoffer makes an interesting point that these publics might better be described by behavior: "inflexibility, ignorance, arrogance, myopia, hesitancy, undercapitalization, overconfidence, spendthrift ways, and hopefulness" (355).

    The following table that shows the relations of typical ecosystems in the earth's biota:

    Model 2: The Relations of Typical Ecosystems in the Earth's Biota

      Producer Herbivore Primary Carnivore Secondary Carnivore Decomposer
    Tundra Lichen, reindeer moss Caribou,
    Wolves, Arctic Fox Polar bears Low, microbes, effects of freezing temperature
    Pond Algae, phyloplankton Zooplankton, crustaceans Dragon flies, mollusks Bass, trout Bacteria, fungi
    Meadow Herbaceous, angiosperms Flies, bees, spiders Beetles, wasps Sparrows, crows, deer, ferrets Bacteria, fungi
    Ocean Blue-green algae Amoebas, radiolarians Crabs, lobsters Tuna, swordfish, shark, turtle Barnacles, coral
    Savanna Grasses, sedges, acacia trees Zebras, wildebeasts, impalas Cheetahs, hawks Lions, leopards, jackals Vultures, hyenas, bacteria
    Market Public, government Dealer Large Speculators Large hedge funds Locals, vulture investors

    Note: It is with the kind permission of the author, Victor Niederhoffer, that we publish this information. To purchase Dr. Niederhoffer's book, The Education of a Speculator, from, go to HFC's Book Shop.

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