Sunday, November 25, 2007
WSJ - Hedge Funds Leveraging Numbers
The Wall Street Journal dumps another load on the already tattered reputation of New York's hedge funds. "When reporting their assets under management, hedge funds typically refer to the amount of money they have attracted from investors...Many hedge funds also borrow money to increase their "leverage," which amplifies their potential returns (and potential losses)....bond fund Y2K said it had assets under management of $2 billion as recently as July...London-based parent Wharton Asset Management UK Ltd. said the fund actually had less than $100 million in investor capital...Investors tend to flock toward funds that have already attracted a lot of money from other investors."
Reuters reports that Goldman Sachs' Global Alpha hedge fund will end the year with roughly $4 billion in assets, about 60 percent less than in January....On top of that, some investors in the Alpha fund asked for their money back. Changes have already been promised at the Alpha fund with the firm telling investors in September the fund would constrain its borrowing in the future and consider the level of borrowing as a separate risk factor.
Janet Bush, writing for a dated article in the NewStatesman, UK, fears Hedge funds are about to destroy the world."What they like is risk - and their main tool is "leverage" - borrowing to play the markets. It is not unusual for a hedge-fund investor to control $100m in securities with only a $5m down payment. Of course, that means that when a bet goes wrong, it goes spectacularly wrong. If the hedge-fund industry's positions in the market are 20 times the cash they actually hold, their potential impact on the world financial system is about equal to US GDP.
That is why the emerging-market stock markets have taken such a battering over the past two months [prior to July 2006] . Hedge funds poured money into emerging markets in the search for high returns, able to borrow billions relatively cheaply while interest rates were low. But as soon as the cost of borrowing increased they had to bail out rapidly, leaving the developing economies to clean up the mess."
Different issue relative to the WSJ article, but when you put the two together, what do you get? Hedge funds are not only using client investments, but also directly borrowing money and then using the sum total to leverage even bigger investments by using their financial capacity as a margin, instead of an actual investment. All or nothing. If it works, the hedge fund managers become millionares. If it tanks, the markets crash.
Sphere: Related Content
Reuters reports that Goldman Sachs' Global Alpha hedge fund will end the year with roughly $4 billion in assets, about 60 percent less than in January....On top of that, some investors in the Alpha fund asked for their money back. Changes have already been promised at the Alpha fund with the firm telling investors in September the fund would constrain its borrowing in the future and consider the level of borrowing as a separate risk factor.
Janet Bush, writing for a dated article in the NewStatesman, UK, fears Hedge funds are about to destroy the world."What they like is risk - and their main tool is "leverage" - borrowing to play the markets. It is not unusual for a hedge-fund investor to control $100m in securities with only a $5m down payment. Of course, that means that when a bet goes wrong, it goes spectacularly wrong. If the hedge-fund industry's positions in the market are 20 times the cash they actually hold, their potential impact on the world financial system is about equal to US GDP.
That is why the emerging-market stock markets have taken such a battering over the past two months [prior to July 2006] . Hedge funds poured money into emerging markets in the search for high returns, able to borrow billions relatively cheaply while interest rates were low. But as soon as the cost of borrowing increased they had to bail out rapidly, leaving the developing economies to clean up the mess."
Different issue relative to the WSJ article, but when you put the two together, what do you get? Hedge funds are not only using client investments, but also directly borrowing money and then using the sum total to leverage even bigger investments by using their financial capacity as a margin, instead of an actual investment. All or nothing. If it works, the hedge fund managers become millionares. If it tanks, the markets crash.
Sphere: Related Content
Subscribe to Posts [Atom]
