The financial writer Sebastian Mallaby made the following observation about hedge funds: Leverage also made hedge funds vulnerable to shocks: If their trades moved against them, they would burn through thin cushions of capital at lightning speed, obliging them to dump positions fast—destabilizing prices.
a. What does a hedge fund’s trades “moving against it” mean?
b. Why would a fund’s trades moving against it cause it to burn through its capital?
c. What is the connection between a fund’s being highly leveraged and its having a “thin cushion of capital”?
d. What does a fund’s “dumping its positions” mean?
e. Why might a fund’s dumping its positions cause prices to be destabilized? Prices of what?