From the London Times
May 15, 2005
City hedge funds head for domino collapse
Peter Koenig and Louise Armitstead
BAD investments by some of the biggest hedge funds in London have triggered unprecedented losses, record demands for money back and talk of a death spiral weighing heavily on stocks and bonds.
GLG, a hedge fund started in 1995 by a group of former Goldman Sachs bankers, has in recent weeks had demands for more than $500m (£270m) from investors wanting to pull out of its $4 billion market-neutral fund.
The predicament of GLG, the biggest group in Europe, with $13 billion under management, highlights the stress being felt at many hedge funds in Europe and America after four months of deteriorating results.
Prime brokers and the credit departments in investment banks have been calling clients to check their capital strengths as rumours of a big hedge-fund blow-out grip the industry.
London-based Cheyne is thought to be down by at least 10% in its credit fund after the downgrading of debt at General Motors and Ford. Ferox, another of London’s most successful funds, is thought to be down nearly 20%. Bailey Coates, Polygon, Rubicon, Vega, Moore Capital and Brevan Howard are all nursing heavy losses of about 5% each in April. Bailey Coates, whose losses reported in The Sunday Times three weeks ago first alerted the wider market to the industry crisis, has had yet more redemption calls.
“What you’re seeing is like a run on the bank,” said Narayan Naik, director of hedge-fund studies at the London Business School. “Selling forces more selling and there’s a cascade effect.”
Although industry experts said there was no hedge-fund blow-out on the scale of Long Term Capital Management in 1998, many are concerned that the worst might not be over.
“There’s not a panic like when LTCM nearly went bust,” said Naik, “but prices will keep dropping until excess money is squeezed out of the hedge-fund industry and a new floor is established.”
After performing well in the fourth quarter last year, funds have run into increasing difficulty this year as a downturn in consumer spending has sparked fears of a broader slowdown.
While GLG reported that one of its key funds was down 5.2%, a Man Group scheme suffered a 3.1% decline and Madrid-based Vega told investors one of its leading funds was down 6%.
May has also started rockily. Some hedge funds were wrongfooted when Standard & Poor’s downgraded General Motors and Ford bonds to junk levels, and US investor Kirk Kerkorian used the opportunity to buy shares. Bond prices fell and share prices rose, the opposite of what fund managers thought would happen.
Hedge funds that specialise in convertibles — bonds investors can exchange for shares — have also had a hard time. Funds had bought up nearly 80% of all convertibles, so when their prices fell it turned into a stampede.
Copyright 2005 Times Newspapers Ltd.
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