Sunday, September 28, 2008

Hedge funds

Are hedge funds the next class of financial institutions to start collapsing? They face record demands for redemptions and are highly geared.  Their share prices are taking a hammering.  Who would want to invest in them these days? High fees and lots of gearing like sub-prime mortgages are acceptible when asset prices are increasing since investors can always at least get their money back. Now they cannot. This crisis has a long, long way to run and the $700b bailout, even if it is eventually passed by the US Congress, is not going to resolve things entirely.


jc said...


There are countless strategies used by hedge funds.

To suggest they will go away is to believe that speculation will go away. It won't and therefore hedge funds won't either as they are excellent vehicles to use. However as there is massive deleveraging of course the number will shrink.

I run a small fund putting my own money alongside that of a few clients based on macro trading mainly currencies, precious metals, bonds and some selected stocks and have had excellent coupla years....

It's my retirement account that’s taken a hammering that was supposed to be long term and rarely fiddled with :-)

You got to watch this blog as he seems to be giving out some bad stuff. He’s suggesting that Lehman may have sold it’s own credit default swaps because Lehman’s bonds fell very quickly. He thinks that Lehman was trying to make money betting against its own chapter 11.

He arrives at this conclusion wrongly. If Lehman were betting against its own bankruptcy it would have simply sold credit default swaps nakedly and wouldn’t have had to touch the bonds to hedge its position as it would have defeated the purpose. John Quiggin has picked up with this ball and run with it thinking this was a possibility after reading this guy and has been led down the wrong track.

Lehman would be buying its bonds not selling them if it was betting against a failure. It would have sold CDS unhedged and certainly not shorted its bonds either to hedge or to take an outright position.

Steve Edney said...


I don't think they were suggesting they were shorting their own bonds, just selling CDS. I believe they are saying that the bonds fell in value because of the rapidly exapanding line of senior unsecured creditors created by the issue of a massive volume of CDS.

Personally I don't buy the story as it relies, I believe on the large volume of CDS held by other counterparties being cash settled which isn't the usual style. A huge physical delivery may push up the value of the bonds.

Personally I think it plunged as it did as there was an expectation that the Fed or someone organized by the Fed would pick up the pieces and not let it fail.

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