Hedge Funds Loan Losses

Hedge Funds Suffering after Racking up Losses from Loans

Hedge funds are struggling to make up big losses after the US financial sector’s losses on large loans exploded in 2009.  Many lenders were hedge funds and at least “one in three dollars lent by non-bank institutions such as hedge funds, securitisation vehicles and pension funds went sour” which is much more than the 11.5% in the traditional banking sector.

The results will increase fears that, in spite of a recovery in the shares and balance sheets of many banks, the epicentre of the crisis has moved to the hedge funds and investors that gorged on cheap credit in the run-up to the turmoil.

The importance of these non-bank institutions was underlined by the review’s finding that they held 47 per cent of problem loans in spite of accounting for only 21.2 per cent of the total loan pool.  Overall, the US financial sector’s losses on loans in early 2009 reached a record of $53bn, nearly triple the previous high in 2002.

The number of loans edging into the danger zone has also surged. Some 15 per cent of the $2,900bn SNC portfolio was classified as “substandard” – the second of the four categories used by regulators – and worse, up from 5.8 per cent in 2008.  Read more..

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Hedge Fund Losses

Hedge Fund Losses in 2008 2009

Here is a video below on hedge fund asset losses and closures. While there is a small set of institutional investors investing in a number of opportunistic hedge funds most are still loosing assets each quarter. Many firms were profitable just 2-3 years ago and now have less assets to manage and little if any performance fees to collect. If you are reading this article over email through our daily hedge fund newsletter please click here to watch the embedded video below.

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Hedge Fund Assets

Hedge Fund Assets Drop by Estimated $100B

(http://HedgeFundBlogger.com) Here is an article on the drop of assets within the hedge fund industry. While all of these reports are simply guesses based on limited information I agree with Kusano below that redemptions will probably continue for 6 months. What will be more interesting though is how much of those assets will jump right back into different hedge funds once the market levels out or turns. There is little evidence that hedge funds will not simply regain all of these assets plus more within the next 3-4 years. Here is the article exceprt:

The global hedge-fund industry lost $100 billion of assets in October, according to an estimate from Eurekahedge Pte, as firms including Sparx Group Co. were hammered by investor withdrawals.

Clients took about $60 billion out of funds, Singapore-based Eurekahedge said in a statement. Funds fell 3.3 percent on average, based on preliminary figures from the Singapore-based data provider, as measured by the Eurekahedge Hedge Fund Index, which tracks the performance of more than 2,000 funds that invest globally. That compares with a 19 percent slide in the MSCI World Index last month.

The biggest market losses since the Great Depression and investor withdrawals hurt the $1.7 trillion hedge-fund industry that manages largely unregulated pools of capital. The index of global funds has lost 11 percent this year, set for the worst performance since 2000 when Eurekahedge began tracking the data.

“This wave of redemptions in the hedge-fund industry is going to last for at least another six months,” said Toyomi Kusano, president of Kusano Global Frontier, a hedge-fund research firm in Tokyo. “There are some funds that halted withdrawals, but those funds would eventually have to defreeze, and that means another wave of redemptions.” Source

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Hedge Fund Discussion

Hedge Fund Discussion Piece

I can’t tell if Mr. Berko is for or against hedge funds, I will leave it up to you to decide….

Dear Mr. Berko: There’s big trouble in the $3 trillion hedge fund industry. Many have lost massive amounts of money because the market has gone against them and thousands of hedge fund employees are losing their jobs. The Hedge Fund Sector is a very vital sector of our economy and I’ve not heard a word from the Department of Treasury or the Federal Reserve about helping the hedge fund industry in this economic crisis. In 2000, then Federal Reserve Board Chairman Alan Greenspan rescued Long Term Capital Management and saved it from complete collapse. Many hedge-fund investors can’t get their investments back because the hedge funds can’t get the credit they need to finance their portfolio positions or investor withdrawals. Do you believe the government should assist these people who invested their money in good faith? — H.W., Boston.

Dear H.W.: Hedge funds are being rocked, socked, knocked, clocked and docked by the market. Most deserve every blow they get and then some. These financial leeches provide zero-sum benefit to our economy. Many of these funds contributed to the mortgage crisis, the credit crisis, the oil crisis, the bank crisis and the soon-to-occur credit card crisis as well as the soon to-occur-crisis with the Big Three auto companies. These funds, along with Goldman Sachs, Lehman Bros., Bear Stearns, etc., helped push the price of oil past the $145 level by trading contracts between themselves at predetermined prices. They are one of the reasons many Americans had to pay $4.25 a gallon and more at the pump. These funds traded and shorted billions of dollars of subprime mortgage securities between themselves, creating unprecedented volatility and cascading losses. And these hedge funds shorted hundreds of millions of shares of bank stocks, collapsing their market values, pushing Countrywide, Fannie Mae, Freddie Mac and Washington Mutual into bankruptcy.

Marrow suckers These hedge funds gleefully sucked the marrow from the backbone of our financial system. They had this power because they are unregulated (they had strong lobbyists in Congress) and are not required to abide by the same rules that control the trading activities of Fidelity, T. Rowe Price, Vanguard and other funds owned by most of the less-affluent public. Many of the 10,107 hedge funds are hurting badly, very badly, as they got caught on the wrong side of the oil market, the wrong side of the commodity market, the wrong side of the dollar, the Yen and the Euro. They got sliced and diced in the derivative market, were boxed by the credit market and bet the wrong horses in the mortgage-backed securities markets. Things got so bad that investors began a stampede to safety and these funds, which were highly leveraged, didn’t have the capital to return principal to their hugely wealthy investors. Read more…

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Hedge Fund Losses

It looks like this January has been the worst month for hedge fund performance and losses since the 1998 crises surrounding Long Term Capital Management. If you follow Financial Armageddon’s blog or have read his blog he thinks that the worst hedge fund losses are yet to come, which by the title of the blog is not entirely surprising. I will let you read and decide that for yourself.

“Many people are still fixated on the idea that what we are going through right now is some kind of short-term disruption. Once the Fed, the Treasury, the Congress and everyone else weigh in with their “solutions,” all will return to “normal.”

But the truth is that what we are witnessing is just one small phase of a far-reaching and significantly more destructive unraveling process…”

Read more of Financial Armageddon’s Blog or the original WSJ article he referenced.

I don’t have a crystal ball so my guess is as good as yours as to where the economy is going to go. As for hedge funds, it will be interesting to look at quarter-end numbers vs. benchmarks especially for Short-biased funds and 130/30 type managers.

- Richard

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