If you're not a multimillionaire, you might not pay much attention to the world of hedge funds. But even if you don't consider investing in hedge funds, the moves that they and other big institutional investors make can sometimes have a big impact on the stocks you own.

Fallout from failure
Perhaps the clearest example of how a hedge fund can affect the overall market comes when it has to liquidate its operations, either because of losses or some other factor. For instance, the Galleon Group recently said that it would wind down its hedge funds, in the wake of last week's announcement that billionaire founder Raj Rajaratnam was among a group charged with violating insider-trading laws.

Along with executives from IBM (NYSE: IBM), Intel (Nasdaq: INTC), and McKinsey, employees at a second hedge fund, New Castle Partners, were also allegedly involved in the scheme. New Castle has said that it intends to stay in business, although some believe that investors may lose confidence in the fund because of the allegations.

In response to Galleon's announcement that its funds will be winding down, some have looked to the stocks that Galleon funds own as potential short candidates. Although Galleon hasn't yet disclosed the stocks it owned as of Sept. 30, its second-quarter filings point to fairly substantial holdings in eBay (Nasdaq: EBAY), Google (Nasdaq: GOOG), and Apple (Nasdaq: AAPL). The reasoning behind the short call is that if Galleon has to sell its huge blocks of stock, it could depress their prices, potentially creating profits for short-sellers, who would then presumably cover their positions after Galleon goes out of business.

Not so fast
Now, it's true that hedge-fund selling can have an impact on the markets. During last year's financial crisis, forced sales by hedge fundsand other institutional investors such as mutual funds likely contributed to the huge drop in stock prices. Mutual fund investors alone took out more than $200 billion from equity funds in 2008, forcing managers to sell stocks they once believed in.

By comparison, as big as Galleon is, it's a drop in the bucket compared to last year's market storm. The Wall Street Journalclaims that Galleon has about $3.7 billion under management. As big as that sounds, it means that the positions that Galleon has in large, highly liquid stocks shouldn't be huge enough to cause major disruptions. Apple trades almost $3.5 billion in shares each day on average, while eBay trades more than $450 million, and Google around $1.5 billion.

Moreover, we don't know whether Galleon still even owns those shares. The hedge funds may have moved on to different investments by now, leaving those trying to open short positions chasing the wrong stocks.

Being smart about selling
Moreover, even if its hedge funds still own those stocks, Galleon won't be short-sighted enough to try to dump all of its shares at once. Unlike hedge funds that are suffering from an immediate need for liquidity, Galleon can afford to take its time and wrap things up in an orderly fashion. Continued...