Deleveraging Accelerates: Hedge Funds Squeezed As Lenders Get Tougher (WSJ)

A

achilles28

Hedge Funds Squeezed As Lenders Get Tougher
http://online.wsj.com/article/SB120485290396718251.html?mod=mkts_main_todays_mkts_tac


The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back.

Loans from banks and brokerages had allowed hedge funds, which manage some $1.9 trillion in clients' money, to amass many times that amount in investments. But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets.

This is producing a negative cycle that has policy makers deeply worried. When investors rush to dump assets, prices fall and ...



Deleveraging will continue as home and CDO losses mount.

More downside pressure ...
 
Maybe not. If the funds are "hedged", long & short positions would have to be offset producing very little movement overall.
 
Quote from nazzdack:

Maybe not. If the funds are "hedged", long & short positions would have to be offset producing very little movement overall.
More...

True in some cases but not in others. The term "hedge fund" today is often a leveraged directional bet vehicle with little hedging... really just an attempt to cash in on the high fees and profit sharing.
 
I believe nazzdack is referring to market neutral funds, or some of these 130/30 funds (100% tracking index + portfolio of 30%long/short to provide alpha).

Unfortunately, when you have a credit squeeze and the cost of capital increases (as well as CDO tranches becoming worthless), you have to delever - in plain terms "reduce positions".

Seems that most of these funds were long the same "good" stocks and short the same "bad" stocks. No surprise, as they all went to the same schools, read the same books on Valuation and Quantitative Portfolio Management and ran the same backtests.

What do you think happens when you start - en masse - selling the good stocks and covering the crap stocks - in order to reduce your positions?

And of course, most strategies entail only long portfolios in equities, so there is carnage as they all delever.

A perfect hedge means there is no downside, but there is no upside either. A long/short market neutral hedge wouldn't work in this case because of what I wrote above. That is anything but a perfect hedge.

Now, portfolio insurance is another issue, but I guess many active portfolio managers don't like paying for that insurance.

For the shenanigans at LTCM - read Jorion's excellent paper here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=169449
 
should the government take over some of these loans?

after the depression hit the government pumped money into agriculture to stop prices from declining. they may have to do that type of activity now in an attempt to keep the bursting from going too crazy.

they'll obviously have to limit what is taken on depending upon risk (subprime related margin calls shouldn't be picked up).
 
You must log in or register to reply here.
Back
Top