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.
FREEDOM OF NAVIGATION: The UK would continue to reinforce ties with Taiwan ‘in a wide range of areas’ as a part of a ‘strong unofficial relationship,’ a paper said The UK plans to conduct more freedom of navigation operations in the Taiwan Strait and the South China Sea, British Secretary of State for Foreign, Commonwealth and Development Affairs David Lammy told the British House of Commons on Tuesday. British Member of Parliament Desmond Swayne said that the Royal Navy’s HMS Spey had passed through the Taiwan Strait “in pursuit of vital international freedom of navigation in the South China Sea.” Swayne asked Lammy whether he agreed that it was “proper and lawful” to do so, and if the UK would continue to carry out similar operations. Lammy replied “yes” to both questions. The
SECOND SPEECH: All political parties should work together to defend democracy, protect Taiwan and resist the CCP, despite their differences, the president said President William Lai (賴清德) yesterday discussed how pro-Taiwan and pro-Republic of China (ROC) groups can agree to maintain solidarity on the issue of protecting Taiwan and resisting the Chinese Communist Party (CCP). The talk, delivered last night at Taoyuan’s Hakka Youth Association, was the second in a series of 10 that Lai is scheduled to give across Taiwan. Citing Taiwanese democracy pioneer Chiang Wei-shui’s (蔣渭水) slogan that solidarity brings strength, Lai said it was a call for political parties to find consensus amid disagreements on behalf of bettering the nation. All political parties should work together to defend democracy, protect Taiwan and resist
By refusing to agree spending increases to appease US President Donald Trump, Spanish Prime Minister Pedro Sanchez threatened to derail a summit that NATO Secretary-General Mark Rutte needs to run smoothly for the sake of the military alliance’s future survival. Ahead of yesterday’s gathering in The Hague, Netherlands, things were going off the rails. European officials have expressed irritation at the spoiler role that Sanchez is playing when their No. 1 task is to line up behind a pledge to raise defense spending to 5 percent of GDP. Rutte needed to keep Spain in line while preventing others such as Slovakia
SHIFT PRIORITIES: The US should first help Taiwan respond to actions China is already taking, instead of focusing too heavily on deterring a large-scale invasion, an expert said US Air Force leaders on Thursday voiced concerns about the Chinese People’s Liberation Army’s (PLA) missile capabilities and its development of a “kill web,” and said that the US Department of Defense’s budget request for next year prioritizes bolstering defenses in the Indo-Pacific region due to the increasing threat posed by China. US experts said that a full-scale Chinese invasion of Taiwan is risky and unlikely, with Beijing more likely to pursue coercive tactics such as political warfare or blockades to achieve its goals. Senior air force and US Space Force leaders, including US Secretary of the Air Force Troy Meink and
RSS