Posted on 05/12/2005 3:51:36 AM PDT by TigerLikesRooster
Wed May 11, 5:37 PM ET
NEW YORK (AFP) - Jitters are growing in financial markets about the potential for failure of hedge funds, largely secretive and unregulated pools of capital, seven years after a spectacular collapse of one such fund.
A number of reports and market rumors circulated in recent days about potential problems with hedge funds, although there have been no confirmed instances of difficulties at any of the funds.
But because hedge funds operate largely in secret, with little or no government oversight, some analysts have been concerned about the possibility of a failure and a subsequent ripple effect on banks and financial markets.
"In the last five years you've had more and more hedge funds managing more and more assets with more and more borrowed money," said AG Edwards analyst Scott Wren.
"When you've borrowed a lot and the market goes against you, you increase your chances of major losses."
"One of the first things you learn about financial markets is that if there's smoke, there's fire," said Robert Brusca, chief economist at FAO Economics, who added that he had no knowledge of any specific hedge fund problems.
Hedge funds, generally operating with money from wealthy investors, can try to beat the overall market by placing risky bets, "short sales" that seek to capitalize on falling prices, and by borrowing money, which can magnify both gains and losses. They may invest in stocks, bonds, commodities or "derivatives" that seek to mimic the performance of another security.
Reports said some hedge fund managers may have been taken by surprise by the abrupt movements in some markets, including the downgrading of credit ratings of Ford and General Motors bonds to "junk" status, and an offer for a big stake in GM's equity by billionaire Kirk Kerkorian.
David DeRosa, president of DeRosa Research, which advises hedge funds and other investment managers, said he was unaware of any specific hedge fund difficulties.
"There are a lot of rumors around. I have no way of knowing if they're true," he said.
Stoking fears is the weak performance of hedge funds this year. Overall, hedge funds lost 1.8 percent in the first four months of 2005, according to Hennessee's Hedge Fund Index, which tracks the performance of about 900 managers.
But hedge funds that trade convertible bonds lost 3.5 percent in April on average, leaving them down 6.3 percent so far this year, according to Hennessee.
DeRosa said: "It doesn't matter if the hedge funds' performance is good or bad, but if a hedge fund is forced into liquidation, it would imply a lot of buying and selling of securities," and the potential for destabilization.
The ripple effect of a hedge fund collapse could affect banks that lend money to the funds, and other securities if a hedge fund is forced to sell in a liquidity crisis.
The fear on financial markets is a repeat of the situation with US hedge fund Long Term Capital Management (LTCM) in 1998, which destabilized global financial markets already in turmoil over financial crises in Asia and Russia.
"The real risk is contagion," said Brusca.
"The problem would be if one hedge fund gets into trouble, and then the other hedge funds lose liquidity and don't have the same flexibility. They might have to sell securities, and then there are more rumors. That's typically how disasters occur."
DeRosa said hedge fund operators generally have controls in place to limit big losses.
"The hedge fund industry is a lot different than it was even five years ago," he said.
"I'm not saying that nothing can ever happen, but by and large, with the advent of modern risk control, (a collapse) is not likely."
Brusca said he was not so sure.
"These are supposed to be the people who know how to handle these problems," he said. "But you run these on statistical models and you don't usually act on events that have a one percent probability."
The LTCM crisis ended when the Federal Reserve brokered a bailout from major Wall Street banks. But Brusca said the Fed itself would be unlikely to help a hedge fund, unless it threatens to undermine economic stability.
"The hedge fund is like the egg that's on the brake pedal of a car," he said.
"If the Fed has to step on the pedal to brake the car, and if they have to squash the egg, that's too bad."
Neither Dubya nor Rumsfeld can take care of them. He can get rid of Nuke/Bio/Chem(NBC.)
>>If somebody inadvertantly steps on any of them, everybody in the world will surely know about it and feel the resulting pain.
it will be temporary fopr mom and pop. those who invest in these devices can, no doubt, stand the loss.
If much of the financial system goes down, mom and pop can also feel the pain even if they invest nothing on those device.
It's been estimated that the total value of all derivative securitues extant is some 100 x greater than that of the underlying stocks and bonds..
Then, if they're shorting stocks, that would constitute naked shorting.
Many smaller hedge funds are fininaced by 'funds of funds'. But now, those funds are also funded the same way. So you have fund of fund of fund of fund of fund of fund of fund of funds. This isn't a healthy situation.
Like I said, it won't effect the larger funds because they don't get money in that way, but all of you who have cousins or freinds from college who have set up their own hedge fund and are running less than 2 billion dollars should be very nervous. They may have their funding pulled suddenly as a result of an event they had nothing to do with.
I'ts already happened on a small scale and I've had freinds who were effected. but now there is a great deal more leverage in the community so it has the potential to spread.
Will the evil, demented powers-that-be on the world stage submit to a higher authority in the very near future?
Moshiach and a modern-day Solon, with help from a top team of course, should be able to sort out the world's financial affairs and facilitate world peace over the coming decades.
Apparently at least one large hedge fund went short GM stock and long GM bonds. Both recently got splattered FWIW.
If there will be such an entity, it won't be a country, but a transnational organization. I am not sure it will succeed, but there will be people who will give it a try anyway.
This is all a scare tactic to bring hedge funds under SEC control--Uncle Sam will win and hedge funds will be regulated =-(
What is the ratio between aggregate size of big funds and that of small funds?
That's no "hedge" -- that is, in fact, what card players call "doubling down". Both are bets against GM.
In that way its kind of like portfolio insurance (which caused the 87 Stock market crash) it's not a problem until everyone does it.
Thanks for your insight. You have been really helpful.
Thank you. Precisely! Lierals [liberals] are still in the last millennium with their obsession to control everything.
Flux is rewriting all the rules--except for Greed and Fear...
If you would, point me in the right direction of these stats.
Regards.
Did you read my entire comment? I said very plainly that I don't have any stats and I dson't think anyone else does either. That sentence you quoted was to shed light on the previous poster's question about the ratio's and how I felt they didn't matter.
"Multibillionaire Warren Buffett is no fan of hedge funds. Or so he said. At the recent annual meeting of the corporate giant he heads, Berkshire Hathaway, Mr. Buffett said hedge funds are a potential threat to the stability of global markets. From Thursday's New York Sun: "Mr. Buffett has invested $620 million of Berkshire Hathaway's money in a hedge fund run by the son of a close family friend." Warren, Warren, Warren.
I thought this was interesting :~)
You said something rather profound. The conspiracy just might not be a theory, just because those who wonder are called names by those who throw their heads back while they call names.
Bet the stats are out there...
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.