Jitters are growing in financial markets about the potential for failure of hedge funds, largely secretive and unregulated pools of capital, seven years after a spectacular collapse of one such fund.
A number of reports and market rumors circulated in recent days about potential problems with hedge funds, although there have been no confirmed instances of difficulties at any of the funds.
But because hedge funds operate largely in secret, with little or no government oversight, some analysts have been concerned about the possibility of a failure and a subsequent ripple effect on banks and financial markets.
"In the last five years you've had more and more hedge funds managing more and more assets with more and more borrowed money," said AG Edwards analyst Scott Wren.
"When you've borrowed a lot and the market goes against you, you increase your chances of major losses."
"One of the first things you learn about financial markets is that if there's smoke, there's fire," said Robert Brusca, chief economist at FAO Economics, who added that he had no knowledge of any specific hedge fund problems.
Hedge funds, generally operating with money from wealthy investors, can try to beat the overall market by placing risky bets, "short sales" that seek to capitalize on falling prices, and by borrowing money, which can magnify both gains and losses. They may invest in stocks, bonds, commodities or "derivatives" that seek to mimic the performance of another security.
Reports said some hedge fund managers may have been taken by surprise by the abrupt movements in some markets, including the downgrading of credit ratings of Ford and General Motors bonds to "junk" status, and an offer for a big stake in GM's equity by billionaire Kirk Kerkorian.
David DeRosa, president of DeRosa Research, which advises hedge funds and other investment managers, said he was unaware of any specific hedge fund difficulties.
"There are a lot of rumors around. I have no way of knowing if they're true," he said.
Stoking fears is the weak performance of hedge funds this year. Overall, hedge funds lost 1.8 percent in the first four months of the year, according to Hennessee's Hedge Fund Index, which tracks the performance of about 900 managers.
But hedge funds that trade convertible bonds lost 3.5 percent last month on average, leaving them down 6.3 percent so far this year, according to Hennessee.
DeRosa said: "It doesn't matter if the hedge funds' performance is good or bad, but if a hedge fund is forced into liquidation, it would imply a lot of buying and selling of securities," and the potential for destabilization.
The ripple effect of a hedge fund collapse could affect banks that lend money to the funds, and other securities if a hedge fund is forced to sell in a liquidity crisis.
The fear on financial markets is a repeat of the situation with US hedge fund Long Term Capital Management (LTCM) in 1998, which destabilized global financial markets already in turmoil over financial crises in Asia and Russia.
Right-wing political scientist Laura Fernandez on Sunday won Costa Rica’s presidential election by a landslide, after promising to crack down on rising violence linked to the cocaine trade. Fernandez’s nearest rival, economist Alvaro Ramos, conceded defeat as results showed the ruling party far exceeding the threshold of 40 percent needed to avoid a runoff. With 94 percent of polling stations counted, the political heir of outgoing Costa Rican President Rodrigo Chaves had captured 48.3 percent of the vote compared with Ramos’ 33.4 percent, the Supreme Electoral Tribunal said. As soon as the first results were announced, members of Fernandez’s Sovereign People’s Party
EMERGING FIELDS: The Chinese president said that the two countries would explore cooperation in green technology, the digital economy and artificial intelligence Chinese President Xi Jinping (習近平) yesterday called for an “equal and orderly multipolar world” in the face of “unilateral bullying,” in an apparent jab at the US. Xi was speaking during talks in Beijing with Uruguayan President Yamandu Orsi, the first South American leader to visit China since US special forces captured then-Venezuelan president Nicolas Maduro last month — an operation that Beijing condemned as a violation of sovereignty. Orsi follows a slew of leaders to have visited China seeking to boost ties with the world’s second-largest economy to hedge against US President Donald Trump’s increasingly unpredictable administration. “The international situation is fraught
MORE RESPONSIBILITY: Draftees would be expected to fight alongside professional soldiers, likely requiring the transformation of some training brigades into combat units The armed forces are to start incorporating new conscripts into combined arms brigades this year to enhance combat readiness, the Executive Yuan’s latest policy report said. The new policy would affect Taiwanese men entering the military for their compulsory service, which was extended to one year under reforms by then-president Tsai Ing-wen (蔡英文) in 2022. The conscripts would be trained to operate machine guns, uncrewed aerial vehicles, anti-tank guided missile launchers and Stinger air defense systems, the report said, adding that the basic training would be lengthened to eight weeks. After basic training, conscripts would be sorted into infantry battalions that would take
GROWING AMBITIONS: The scale and tempo of the operations show that the Strait has become the core theater for China to expand its security interests, the report said Chinese military aircraft incursions around Taiwan have surged nearly 15-fold over the past five years, according to a report released yesterday by the Democratic Progressive Party’s (DPP) Department of China Affairs. Sorties in the Taiwan Strait were previously irregular, totaling 380 in 2020, but have since evolved into routine operations, the report showed. “This demonstrates that the Taiwan Strait has become both the starting point and testing ground for Beijing’s expansionist ambitions,” it said. Driven by military expansionism, China is systematically pursuing actions aimed at altering the regional “status quo,” the department said, adding that Taiwan represents the most critical link in China’s
RSS