Part 6/8:
An additional layer complicating the market's decline is the presence of hedge funds, which approach investing differently than traditional mutual funds. Many hedge funds have seen profits during a prolonged bull market, leading to increased leverage in their investments. Using borrowed funds to enhance returns may seem advantageous during rising markets, but it poses significant risks in downturns.
When share prices fall, these funds face margin calls, requiring them to liquidate positions hastily to cover losses, further adding to the downward spiral in share prices. The interconnectedness of leveraged positions and forced selling leads to a cascading effect that exacerbates market instability.