The most remarkable aspect of this year has been the “no place to hide” phenomenon that has made just about every kind of investor look foolish. With a small number of impressive exceptions, nearly every form of fund and every class of investor has taken it on the chin in 2008.

The incredibly rapid erosion of prices in almost every asset class has been accompianied by extraordinary volatility. This meant that investors have had to get the timing right in addition to the investments themselves. That’s how the commodities traders and market neutral strategies manged to get zapped.

No Place to Hide

Recall that in late June the price of oil, and in fact most major commodities, began a sudden and large plunge in price from their previous frothy heights. A barrel of oil hit nearly $150 at the peak and promptly dropped nearly by a third in a matter of a few weeks. Likewise, steel, gas, potash, coal, and many others fell in lockstep. As a result, commodities, which had been the great soaring bull story of 2008 plumetted back to earth. Similarly, shares of big investment banks, commercial banks, and brokerages such as Lehman, Merrill, Wachovia, Washington Mutual, and, yes, even Goldman Sachs, came to be traded as serious bankruptcy risks, sometimes exhibiting intra-day volatilities in excess of 50%.

Any manager that wasn’t clubbed by the unbelievably rapid drop in asset prices, could easily have gotten whacked by the unprecedented increase in market volatility. The volatility index for the S&P 500 ran up to record levels, whipsawing traders and causing the prices of options to skyrocket. Thismademanycommonhedgingstrategies extremely expensive in the short term (including ours).

There appears to be a correlation between bear markets and spikes in volatility. This bear market is no exception. Volatility got so high that major indices started experiencing more than 10% intra-day swings. We starting telling a joke around our firm: “We had a good year this afternoon.”

It is almost certain that volatility levels will have to calm down before the stock market can establish some kind of bottom and ultimately start to recover. But in the meantime, prepare for a wild ride.

The Bailout at the End of the World

There seems to be little doubt that the end of the world has come, at least in the sense we have been referring to it in this newsletter. We are now in a full blown credit “crisis” with major global banks teetering on the edge of solvency. Many forms of credit have essentially dried up with more disasters to come. Broad government interventions are virtually guaranteed to continue at unprecedented levels. And to add to the fun, the crisis is now indisputably global in nature. I’m writing this one day after President Bush signed (the revisions) to the Emergency Economic Stabililization Act of 2008, authorizing the Secretary of the Treasury to establish “TARP,” the much discussed Wall Street bailout. TARP is The Troubled Assets Relief Program, the $700 billion dollar federal relief program, authorizing the Treasury to bolster up the banking system. The legislation is well intended. It’s stated purpose is to keep more of us in our homes and to keep as many banks as possible from folding.

Whatever TARP ultimately turns out to mean, a few things seems clear: The text creates the opportunity for the Treasurytosavethefinancialworld---itguaranteesnothing. The coming months will witness the creation of a new federal bureaucracy with a huge checkbook. Secretary Paulson and his successor will attempt to reliquify, recapitalize, and “reconfidence” a system eaten by poorly understood termites. What will the Government actually buy? Who will they actually buy it from? What will they pay for it? Under what terms? These are the trillion dollar questions.

Eric Wanger, JD, CFA