As a recent Fed report and a recent book have pointed out, forced liquidations can often propagate a death spiral for leveraged investors as more and more assets are dumped to meet margin calls (see related posting).  The Bear Stearns situation is a living case study for this phenomenon.

At the same time, commentators have derided hedge funds for investing in illiquid securities.  By doing so, they say, hedge funds are setting themselves up for just such a situation.  Liquid assets: good, illiquid: bad, they argue.

But is there anything inherently wrong with investing in illiquid securities?  After all, private equity funds have done so for years.  In fact, such investments are considered the key behind the success of university endowments (see related posting).

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