Several more hedge funds have issues

Discussion in 'Wall St. News' started by RedDuke, Aug 9, 2007.

  1. RedDuke


    This is my second thread for today on this subject. All of a sudden these news come from all over thw place. The sotry however is always the same. "But this never happened before, our models are fine".

    Big liquidation triggers hedge fund turmoil
    'Market neutral', 'quant' funds hit hard; shades of LTCM

    By Alistair Barr, MarketWatch
    Last Update: 2:39 PM ET Aug 9, 2007

    SAN FRANCISCO (MarketWatch) - The liquidation of a big hedge fund or investment bank trading portfolio is causing havoc in some parts of the hedge fund business, according to managers and investors.

    Black Mesa Capital, a hedge fund firm that uses computer models to track down investment ideas, has told investors that at least one very large hedge fund or investment bank is liquidating "massive" trading portfolios, according to a letter the Santa Fe, NM-based firm sent to investors on Wednesday.

    That's causing disruptions and triggering big losses among other so-called market-neutral hedge funds, Black Mesa said in its letter, a copy of which was obtained by MarketWatch on Thursday.

    "Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before," Black Mesa's managers Dave DeMers and Jonathan Spring wrote. DeMers declined to comment on Thursday.

    The firm's hedge fund, which has about $1.9 billion in long positions and $1.9 billion in short positions, is down roughly 7.5% this month through Aug. 7. It could be down as much as 10% since then, Black Mesa noted.

    A hedge fund run by Goldman Sachs , called the North American Equity Opportunities fund, has sold some of its positions recently, the Wall Street Journal reported on Thursday. Goldman's largest hedge fund, the Global Alpha fund, has suffered losses recently and may also be selling positions, according to other published reports this week. A Goldman spokesman declined to comment on Thursday.

    Quant quake

    The Global Alpha fund, which manages almost $10 billion, is a so-called quantitative fund, using computer models to track down investment opportunities.

    Such "quant" funds are popular among some hedge fund investors. Many use a market neutral strategy, which aims to balance long positions with short trades, or bets against securities. Others are so-called statistical arbitrage funds, which analyze the historical relationships between related securities and trade when those relationships get out of whack.
    Many players in this part of the hedge fund business have similar positions and use lots of leverage, or borrowed money, to increase their bets. However, that also magnifies any small losses. Some of these hedge funds also offer relatively short redemption periods, allowing investors to take their money out every month, with 30 days notice or less.
    So if losses trigger investor redemptions, these funds may have to sell lots of their positions. That, in turn, puts more pressure on the historical relationship between related securities, handing more losses to other hedge funds in the space.
    If such positions are sold by lots of managers at the same time, the most leveraged funds get hit the hardest, possibly forcing big liquidations of portfolios, which triggers a chain reaction.

    Shades of LTCM

    Two hedge fund investors who didn't want to be identified said on Thursday that the current turmoil is reminiscent of the collapse of Long-Term Capital Management in 1998.

    That giant hedge fund had some arbitrage positions based on the historical relationship between related securities. It made bets about the relationship between the prices of government securities from around the world. When Russia defaulted and devalued its currency the ruble, there was a flight to quality that caused the prices of U.S. Treasury securities to spike.

    LTCM collapsed amid such rapid market dislocation and had to be bailed out by several of the world's largest investment banks as part of a plan organized by the Federal Reserve.

    Highbridge, others

    Black Mesa told investors on Wednesday that other market-neutral hedge funds have suffered losses of between 5% and 15% so far in August.
    The Highbridge Statistical Market Neutral Fund, a $1.8 billion hedge fund run by J.P Morgan Chase unit Highbridge Capital, fell more than 5% this month through Aug. 8, according to the bank's Web site. The fund uses computer models to pick undervalued and overvalued securities and maintains roughly equal positions on both sides to iron out the effect of broader market fluctuations.
  2. Isn't this the point of today's market structure? That risk is spread out over a number of funds and that those who bet wrongly will bear the pain? Why should this news be negative for the market as a whole?
  3. gnome


    Hedge fund jitter-itis is like cockroach syndrome. Where there's one....
  4. RedDuke


    Yes, but this is theory. Reality could show that way too many have similar allocations.
  5. It doesn't work when half the funds have one position (long volatility) and the other half have the opposite position (short vol). Half the funds go out of business and, if losses are too large, there is no counter-party to the winning funds. On paper, there are winner and losers. But in reality, everybody has illiquid contracts* on their books and everybody loses.

    * If you don't believe this, you haven't been reading about how the sub-prime CDO market has disappeared.
  6. can you name the markets?
  7. Market Neutral Hedge Funds usually trade equities... common stocks.
  8. Ah-so. Can nothing be contained then if brokers and banks on the clearing end of these hf's are on the hook as well?
  9. Div_Arb


    I believe they are named Grumpy, Happy, Sneezy, Bashful, Sleepy, Doc, and Dopey.