Another LCTM Blow up, Who?

[ozzy]

Quote from bladerunner:

al qaeda is unwinding their oil positions.
need cash to buy more arms.

I have no respect for the middle east. They should nuke the entire region and start over again. The people are ignorant, uneducated and fanatical.

Forget about Al qaeda unwinding, how about Bush's bed buddies the Saudis. Unbelievable the shit that goes on in this world. Someone needs to clean these ppl up.

ozzy "in angry mode today"

 

[Banjo]

swirled that a couple of hedge funds were facing trouble as a result of their exposure to General Motors Corp. (GM: news, chart, profile) bonds. Last week, Standard & Poor's cut its credit rating on the world's largest automaker to "junk" status.

The implications of the downgrade on hedge fund positions in credit derivatives also weighed on the minds of investors and traders.

Equities and the U.S. dollar fell while Treasury bonds and gold climbed as investors looked for relatively safe places for their money.

A Wall Street Journal report Tuesday highlighting recent troubles in the hedge fund industry also fueled concerns. See full story at WSJ.com.

Deutsche Bank (DB: news, chart, profile) slid 3.3% amid talk that the bank is the prime broker for QVT Financial L.P., one of the hedge funds rumored to be in distress. A London-based spokeswoman wouldn't comment.

Other investment banks with sizeable hedge fund brokerage businesses also dipped: Bear Stearns (BSC: news, chart, profile) slid 3.4%; Goldman Sachs (GS: news, chart, profile) shed 3.2% and Morgan Stanley (MWD: news, chart, profile) declined 2.6%.

QVT Financial, investment manager of the QVT Funds, said speculation that a QVT hedge fund was one of those in trouble is "categorically untrue."

"We were up 2.6% year-to-date through April, and we are up even slightly more in May at present," said Dan Gold, chief executive of QVT. "We welcome further difficult market conditions because we think they will present buying opportunities to strong funds such as ourselves."

Gold added, however, that QVT believes "the current conditions in convertible and structured credit markets will pose difficulties for many of our competitors."

Other hedge funds mentioned by market professionals were GLG Partners, a London-based hedge fund, and Highbridge Capital, a $7 billion New York firm majority owned by J.P. Morgan (JPM: news, chart, profile) .

Spokesmen for Highbridge and J.P. Morgan declined to comment.

GLG, which has reportedly been in talks with Lehman Bros. (LEH: news, chart, profile) about being acquired, also wouldn't comment.

Tim Ghriskey, chief investment officer at Solaris Asset Management, a New York-based investment firm that offers hedge funds, said he heard speculation Tuesday morning that a large hedge fund was unwinding positions in GM bonds and may have taken losses in those positions.

Still, Ghriskey said rumors of hedge fund blowups are "very common."

GM trade

So-called arbitrage hedge funds may have been hurt the most by General Motors's recent troubles.

Arbitrage involves ironing out price anomalies between related securities.

One common type of trade is to short the equity and buy the bonds of a company that's been downgraded to junk status.

In theory, if the company files for bankruptcy, its stock would be worth nothing, while its bond holders may be entitled to a portion of the firm's assets.

 

[Banjo]

When S&P cut its rating on the carmaker's debt, GM bonds fell. But the company's shares also rose when Kirk Kerkorian announced he would bid for a stake in the firm.

Convertible troubles

As the largest issuer of convertible bonds, GM's troubles highlighted the recent struggles of hedge funds operating in that market.

Convertibles pay a coupon like traditional corporate debt notes, but also give investors the chance to convert their holdings into stock of the company at a set price in the future.

Hedge funds are big players in this market and many follow strategies known as convertible arbitrage, which involves ironing out differences between the value of convertible bonds and the stocks to which the debt is linked.

Hedge funds that trade convertible bonds lost 3.5% in April on average, leaving them down 6.3% so far this year, according to Hennessee Group, an industry consultant which tracks performance.

Overall, hedge funds lost 1.8% in the first four months of 2005, according to Hennessee's Hedge Fund Index, which tracks the performance of about 900 managers overseeing at least half of the capital in the industry.

Several convertible arbitrage managers took a beating in April as a result of widening credit spreads, problems at General Motors and redemptions from hedge fund investors, Hennessee said.

That's created "the worst convertible arbitrage environment since 1994," the consultant added.

Structured credit

GM's credit downgrade may have triggered problems in structured credit markets too.

Structured credit products use derivatives to shift credit risk from a person or entity looking to buy protection onto sellers of protection.

The products include collateralized debt obligations and credit default swaps that can cover a basket of different companies, according to Randall Dodd, director of the Financial Policy Forum, a non-profit research institute set up to study the regulation of financial markets.

Credit default swaps are a form of insurance against corporate debt default.

Providers of this credit insurance have to pay in the event of a default or bankruptcy. However, depending on how products are structured, they may also have to pay if there's a credit downgrade or credit spreads widen beyond a certain point, Dodd said.

Because GM has sold so many bonds, it's usually a part of these baskets of credit risks, he added.

"People that have sold protection now are taking a beating because they have GM all over the place," Dodd said.

Standard & Poor's cut its ratings Tuesday on six synthetic collateralized debt obligations arranged by Deutsche Bank after "negative credit rating migration within the underlying reference portfolios of each transaction."

S&P didn't say what credit rating changes triggered the move, however Dodd said it was likely related to GM and Ford debt being cut last week to "junk" status.

Surging assets

Hedge funds are private investment partnerships that can bet on falling as well as rising prices. Sporting track records of steady annual returns in both up and down markets, the funds have attracted billions of dollars in new money in recent years and now oversee about $1 trillion.

Surging assets and the proliferation of new managers have sparked concerns that returns may fall as more traders chase a finite number of investment vehicles.

In recent years, hedge funds have faced further challenges as interest rates languished near record lows, credit spreads narrowed and market volatility declined.

With fewer opportunities, some managers have taken on more risk in search of higher yields, said Kevin Mirable, a partner at S3 Asset Management, which provides prime brokerage services to the industry.

Now that interest rates are rising, credit spreads have widened and volatility has picked up, some hedge funds may not be able to handle the change, he added.

"These things are historically handled very well by hedge funds," said Mirable, former head of Barclays Capital's hedge fund services group. "But there are a lot more hedge funds doing this now and there'll be some that may have come into business in the past 5 years that will really be challenged

 

[TorontoTrader2]

Quote from ozzy:

I have no respect for the middle east. They should nuke the entire region and start over again. The people are ignorant, uneducated and fanatical.

Forget about Al qaeda unwinding, how about Bush's bed buddies the Saudis. Unbelievable the shit that goes on in this world. Someone needs to clean these ppl up.

ozzy "in angry mode today"

A little off topic, but I can not resist pointing out some facts.

In the West we are the ones who know NOTHING about the middle eastern culture, and their lifestyle in most countries is as modern as our technology.
CNN/FOX only throw out fear buzzwords like 'hardliner, radical, extremist'.

Uneducated: lots of universities in Iraq and Iran and any other country. Do you even see on the Jay Leno show where he asks random people on the street basic questions? Most people are clueless - a steady diet of sitcoms and soundbites on TV and video games keeps everyone ignorant of the outside world.

Fanatical? There was a report on CNN and in LA Times, how a church kicked members out because they didn't support Bush. Yikes, this is religious extremism at its worst.

I dare you to post a sign on your lawn that reads "I am for peace, I am against the war", and see how fast your home is egged, or tires slashed, or neighbors ignore you.
Freedom indeed....

But you are right, the drug, oil, and arms trade is the most profitable thing in the world. The US controls much of it, via Afghanistan they run (that country is almost #1 drug producing country) , this war has been a winfall for all defense companies and all those involved in Oil (basically the whole bush admin).

This is not a political slag, just pointing out that every country has major corruption.

 

[estrader]

Quote from TorontoTrader2:



Fanatical? There was a report on CNN and in LA Times, how a church kicked members out because they didn't support Bush. Yikes, this is religious extremism at its worst.

You think this is religious extrimism at its worst??? I guess, when an Imam calls for slaughter of all non-muslims, it is nothing compared to kicking someone out of a church.

I guess that sums up the left wing ideology.

 

[Merlin]

Quote from TorontoTrader2:

A little off topic, but I can not resist pointing out some facts.

CNN/FOX only throw out fear buzzwords like 'hardliner, radical, extremist'.

Sorry, you can't compare the 2 networks.

Uneducated: lots of universities in Iraq and Iran and any other country. Do you even see on the Jay Leno show where he asks random people on the street basic questions? Most people are clueless - a steady diet of sitcoms and soundbites on TV and video games keeps everyone ignorant of the outside world.

Most if not all universities in the middle east are centered around the Quron not hard science or facts.

Fanatical? There was a report on CNN and in LA Times, how a church kicked members out because they didn't support Bush. Yikes, this is religious extremism at its worst.

They weren't kicked for not supporting BUsh, they were kicked out because the church had rules concerning politics in the church. It doesn't allow them and the people who were kicked out refused to follow that rule.

 

[straddler]

The fact the GM was cut to junk last week is irrelevant. The bonds were already trading below investment grade, S&P just made it official for the public. Any hedge fund that did not see this deserves to blow up. Most of these "managers" are former lawyers and bankers with deep pockets and connections. They are more concerned with what schools they need to give a huge donation. Because in Manahattan, if you don't get into the right pre-school, then forget about Harvard later on.

 

[TorontoTrader2]

sorry man, all the online stock chat forums I am in, people call them 'rag heads' and 'sand ni____s'. The hate and extremesm that is widespread is unreal here, as bad as the brainwashing in the Middle East.
The marines didn't go over there to plant flowers, don't be naive. They went over there to grease as namy people as possible

Sad facts, available to anyone who wants to look. That's all I have to say, good trading.

 

[sle]

I just saw Kudlow (or is it Cramer - the fatish guy with goatee?) on TV and he had no clue either, was babling about investors taking money out or something. So I guess I should explain. While this was a credit related problem, it was not specific to GM. Let me explain one more time, this time for credit-derivatives challenged individuals.

A number of hedge funds engaged in what is known as "correlation trading". The structures that provide for this kind of trading the best are CDO (Collateralized Debt Obligations). CDOs in a sense are baskets of low-grade bonds. The pay from these bonds is split into tranches, tranches are paying in what's called "waterfall" structure. In short, senior tranches pay always and are rated AAA. So, if something defaults, they still pay their coupon. Mezzanine tranches are the first to recieve everything that's left after senior tranches. On the very bottom, there are "equity" tranches, which are piles of shit paying very high coupon.

So, given this structure, you can find "arb" in form of payment/probability mismatch. Let's say mezz tranche paying 5% with 5% default probability for every bond, while equity tranche is paying 25% with 15% default probability for every bond. It's only natural to say - well, let me buy 1 unit of equity tranche and sell 3 units of mezzanine tranche to be hedged against default. Nice carry of 25 - 5 * 3 = 10%. Free money, right? The only problem is that if a bunch of companies decide to default at the same time, your equity tranche will suffer much more. That's exactly what happend here and since the tranche purchase are financed on margin (well, repoed out, which is the same thing), some positions had to be unwound. Some big positions, to be specific. That's what you saw today.

 

[stock777]

Nothing but not so thinly disguised gambling, with little or no respect for outlier events because it's other peoples money and so what if it blows up once a decade we made our killing.