HenryTo
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Joined: 06 Aug 2004
Posts: 11735
Location: Los Angeles, California
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 Posted: Wed Sep 26, 2007 10:58 pm Post subject: Hedge Fund Redemptions Yet to Come |
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One thing to watch out is the effect of fund-linked derivatives, especially the leveraged ones:
http://www.ft.com/cms/s/0/4a2d9156-6c74-11dc-a0cf-0000779fd2ac.html
| Quote: | But redemptions by fund-linked derivatives are automatic, governed by complex rules laid down by their creators, mostly big investment banks.
“A lot of people had a very poor August, and that will be triggering, for sure, a number of deleveraging requests,” said Richard Burns, global head of hybrids at Citigroup.
“Having had a bad July, they were already testing those lower levels.”
Bankers specialising in the area estimated the total structured product exposure at about $200bn, and said several billion of that would be redeemed this month, with money likely to come out by the end of the year.
small number of these structures were written on single manager hedge funds, bankers say, and are likely to have been hurt, though none as badly as the Barclays Capital leveraged share class provided to Bear Stearns to create its High-Grade Structured Credit Strategies Enhanced Leveraged Fund. This is now in bankruptcy proceedings, leaving Barclays nursing a loss understood to be around $200m and consulting lawyers.
The second method is through a structured note issued by a bank directly to an investor, offering exposure either to a particular fund of funds or a basket of underlying funds.
Many of these come with a guarantee, rather than leverage, or are used by big institutional investors to shift credit risk from the underlying funds on to an investment bank.
Many are also created to get round restrictions on selling hedge funds in jurisdictions such as Germany and Japan.
But again, leveraged notes created just before the summer plummet are likely to have passed limits forcing redemptions.
Making the pain worse, many of the biggest name single manager funds often included in these funds have done badly, bankers say – including Tudor Investment, Moore Capital and Goldman Sachs.
“There are some blue chip exposures that would be included in many fund derivatives,” said one banker. “On top of that, many supposedly diversified strategies turned out to be highly correlated, which hasn’t helped.” |
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