Hedge funds on the brink as US Federal Reserve cash fails to ease crisis

[magellan]

Source: The Times (UK)

Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve this week to ease America’s deteriorating credit crisis with a $200 billion collateral lending facility.

The potential closure of six funds came as a leading private equity executive, who declined to be named, said that such funds were “snapping like twigs”, with one failing every day.

Yesterday Patti Cook, Freddie Mac’s chief business officer, predicted that the Federal Reserve’s $200 billion bond lending facility this week would fail to solve the long-term problem of Wall Street’s deepening credit crisis.

The funds’ predicament – seven funds have been frozen this month – was seen as evidence that the initiative by America’s central bank to allow lenders to swap their risky mortgage-backed bonds for safer Treasury debt, will be of help only in the short term. Those fears hit the dollar and New York equity markets, with the greenback falling to a new low against the euro and sterling, as the European currency hit $1.55 for the first time.

more...

Read more: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3542723.ece

[papau]

1. hedge fund money loss is like any other investment loss only it affect the very rich - so

now the Fed has a special need to guarantee the rich a return of principal in stock and derivative investments?

[GreenPartyVoter]

3. Isn't that their motto? "Protect the super-rich?"

[papau]

5. seems that way

[noel adamson]

9. The super rich own and profit (in several ways) from the Federal Reserve Bank.

It is no more federal than Federal Express and not much of a reserve either. They likely just printed up the two hundred million bucks or some sort of a promissory note.

[AngryAmish]

20. Depends on the hedge fund

Many governmental investment groups (think teacher pensions) and other pension funds (union pension funds) invest through hedge funds.

Hedge funds are just another investment vehicle. They are neither good nor bad (although many of them are stupid -- but if I was so smart wouldn't I run a hedge fund?)

Anyway, without knowing the actual investors allowing a bailout may be a good or a bad thing. We don't know. Cheers.

[annabanana]

21. I assume that Federal Pensions are tied up in that too. . . n/t

[GreenPartyVoter]

2. Greeeeaat

[alittlelark]

4. We invested our $$$ in Euros, Reals, and E. European funds

We are doing quite well.

[Newsjock]

6. When I said earlier ...

... that Bushco had managed to buy one day of favorable headlines for a mere $200 billion, I wasn't kidding. The bill is already coming due.

[gravity]

7. This is like a bank run

Hedge funds could run a safe portfolio, but still blow up because too many people want to get out and they are forced to liquidate.

When you manage a billion in assets, you can't liquidate without significantly lowering the price. This temporary lowers the value of the remaining assets in the fund, which causes more investors to get out lowering the prices even more, causing more people to get out until the fund blows up.

The problem with most of these funds have to do with liquidity, than taking to much risk (although many did). When hedge funds have to force to sell illiquid securities in a short period of time, it is going to break the markets.

The Feds actions are trying to ease this liquidity crisis by allowing banks and hedge funds to borrow liquid treasury securities to cover their illiquid bonds temporarily, to ease the pressure on the markets.

[PSPS]

11. "Borrow" my ass

... allowing banks and hedge funds to borrow liquid treasury securities to cover their illiquid bonds temporarily ...

But in fact, from the original article, thie printing press exercise was intended to allow lenders to swap their risky mortgage-backed bonds for safer Treasury debt.

So the fed exchanged treasury securities (supposedly the best instrument we have -- backed by the "full faith and credit") for these joke toxic mortgages. In other words, $200 billion was printed up and handed to bush cronies who were caught up in the ponzi scheme. That's all it was intended to do -- bail out bush's rich pals.

[Deny and Shred]

17. They would not FORCED to sell, unless they are leveraged.

Nobody told hedge funds to leverage themselves to the hilt. The drop in prices can be ridden out by those with equity. Those who are leveraged, even if 'safe', as you say, are hurt by margin calls due to the price drop. Nobody told the hedge funds to get involved in credit derivative swaps, and only those who did heavily are having assets frozen, as far as I've read.

In a couple years, Wall Street will find another unregulated vehicle, and obfuscate some other asset class, and this will all happen again.

[gravity]

19. When investors want to get out of hedge funds, they have to sell

leverage makes the problem worst and can cause similar problems.

There is no doubt that many hedge funds took excessive risks and are paying for the price. The problem is that these effects spread over to investors who didn't take as much risks

[BadgerLaw2010]

22. Hedge funds do not work without massive leverage. Most base returns just aren't that good.

[pfitz59]

8. And just a couple of years ago...

http://money.cnn.com/2005/07/01/markets/hedgefundpay/index.htm

Greedy Bastids!

[ProgressiveEconomist]

10. "Several ... were on the brink of collapse ... or had halted withdrawals"

So the deleveraging that started with subprime mortgages has spread not only to prime but to hedge funds? Are we on the verge of frantic selling not only to meet margin calls but for precautionary reasons?

As Richard Bookstaber warned all over the media last year (see http://www.amazon.com/Demon-Our-Own-Design-Innovation/dp/0471227277 ), when deleveraging hits the BEST equities fall first, since they provide hedge funds and other big traders with the most cash the quickest.

[Baby Snooks]

12. The Carlyle Group

It was interesting that the Federal Reserve decided to bail out the hedge funds the day after it was announced that the Carlyle Group's hedge fund in Europe was facing margin calls it couldn't meet.

Reality of the Federal Reserve's actions the past six months is that they have been flushing money down the proverbial toilet.

The voodoo economics that brought us Enron are probably going to bring us to our knees. The banks simply are no longer solvent.

[Baby Snooks]

13. The first domino?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a27ldweXtg0Y&refer=worldwide

The Carlyle Group ain't what it used to be. It may be the first domino to fall causing the others to fall in succession.

[SpiralHawk]

18. "Shock and awe, Baby. Smirk." - Them

[ConcernedCanuk]

14. Did anyone really think that playing with the books was gonna fix the problems?

.
.
.

Outsourcing -off-shoring so the rich get richer and don't pay taxes

Perpetual war, and warmongering wasting trillions of $$$$

Disregard for the environment - costing loss of food production and more

And so on

We have to grab onto a basic reality in our World, the Earth

"Survival of the fittest"

We are proving to Momma Nature that we are "unfit"

Figure it out.

[salin]

15. And yet after the spectacular near collapse hedgefund in the late 90s

that "required government bailout" - didn't make any investors worry about hedgefunds as a risky vehicle, and instead created many more. So many aspects of this 'credit crisis' seem like repeats on a grander scale from the past - guess the old saying that if one does not learn from history one is doomed to repeat the mistakes is aprapos.

[freefall]

16. Does anyone know how Avenue Capital Group the New York

hedge fund that Chelsea Clinton works for is doing? The OP mentions six funds that have the potential to close and seven that have frozen assets this month but the article doesn't name them.

Thanks,

freefall