05-11-2005, 08:54 AM
Hedge Fund Rumors Rattle Markets By Riva D. Atlas May 11, 2005
Long-simmering worries about the growing influence of hedge funds erupted yesterday in a wave of nervous selling on world stock markets after talk that hedge funds had suffered large losses tied to the debt of General Motors (http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=GBM). Shares of banks with connections to hedge funds fell sharply, even though the rumors could not be substantiated.
Hedge funds, lightly regulated investment pools for the wealthy and institutions like pension funds, have been a source of concern for some investors because the recent flood of money into the funds appears to some to have the earmarks of an investment bubble.
For Wall Street, however, the funds have been a huge source of profits. Banks made an estimated $25 billion last year catering to hedge funds - lending them money, trading for them, helping to devise complex derivative transactions or lending them stock to bet against a company, according to a recent report by Credit Suisse First Boston. Some of the rumors yesterday involved hedge funds that have sold ownership stakes to the investment banks in recent months.
The increasing ties of hedge funds to Wall Street, the runaway growth of the funds and the relative secrecy of their operations have made a number of investors uneasy. At a time when stocks have been weak, and bond investors have been unnerved by last week's credit rating cut on two of the biggest issuers of bonds, G.M. and Ford (http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=F), it is perhaps not surprising that the markets could be so easily rattled.
"No hedge fund declared bankruptcy during the day and no one could come up with the name of a hedge fund close to that status," Richard Bove, an analyst with Punk, Ziegel & Company, noted in a report yesterday. But "the rumor did stimulate a thought process," he said, "suggesting that there was vulnerability" in the business of catering to hedge funds.
…………………………………………†¦
Last fall, the Federal Reserve set up a group to look at what systemic risks had been created by the explosion of entrants into the hedge fund market and the aggressiveness with which Wall Street was welcoming them. It also encouraged the revival of a high-profile watchdog group formed in the wake of the Long-Term Capital crisis. Called the Counterparty Risk Management Policy Group II, it will examine everything from narrow credit spreads - a result of low perceived risk - to concerns that Wall Street may be cavalier in its lending to hedge funds.
A spokeswoman for the Federal Reserve Bank of New York declined to comment yesterday.
The worries about hedge funds come at a time when the performance of many funds has slumped. After record flows into the funds in recent years, many of these portfolios are suffering losses this year.
Although most funds' returns are down by a few percentage points through April, the weak results to date have caused some worries that performance may have peaked. With interest rates rising, some investors could be tempted to shift their money out of the funds and into the bond market as a safe haven, said Antoine Bernheim, publisher of the U.S. Offshore Funds Directory. Funds specializing in everything from junk bonds to commodities have suffered poor results in recent weeks.
………………………………………
Long-simmering worries about the growing influence of hedge funds erupted yesterday in a wave of nervous selling on world stock markets after talk that hedge funds had suffered large losses tied to the debt of General Motors (http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=GBM). Shares of banks with connections to hedge funds fell sharply, even though the rumors could not be substantiated.
Hedge funds, lightly regulated investment pools for the wealthy and institutions like pension funds, have been a source of concern for some investors because the recent flood of money into the funds appears to some to have the earmarks of an investment bubble.
For Wall Street, however, the funds have been a huge source of profits. Banks made an estimated $25 billion last year catering to hedge funds - lending them money, trading for them, helping to devise complex derivative transactions or lending them stock to bet against a company, according to a recent report by Credit Suisse First Boston. Some of the rumors yesterday involved hedge funds that have sold ownership stakes to the investment banks in recent months.
The increasing ties of hedge funds to Wall Street, the runaway growth of the funds and the relative secrecy of their operations have made a number of investors uneasy. At a time when stocks have been weak, and bond investors have been unnerved by last week's credit rating cut on two of the biggest issuers of bonds, G.M. and Ford (http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=F), it is perhaps not surprising that the markets could be so easily rattled.
"No hedge fund declared bankruptcy during the day and no one could come up with the name of a hedge fund close to that status," Richard Bove, an analyst with Punk, Ziegel & Company, noted in a report yesterday. But "the rumor did stimulate a thought process," he said, "suggesting that there was vulnerability" in the business of catering to hedge funds.
…………………………………………†¦
Last fall, the Federal Reserve set up a group to look at what systemic risks had been created by the explosion of entrants into the hedge fund market and the aggressiveness with which Wall Street was welcoming them. It also encouraged the revival of a high-profile watchdog group formed in the wake of the Long-Term Capital crisis. Called the Counterparty Risk Management Policy Group II, it will examine everything from narrow credit spreads - a result of low perceived risk - to concerns that Wall Street may be cavalier in its lending to hedge funds.
A spokeswoman for the Federal Reserve Bank of New York declined to comment yesterday.
The worries about hedge funds come at a time when the performance of many funds has slumped. After record flows into the funds in recent years, many of these portfolios are suffering losses this year.
Although most funds' returns are down by a few percentage points through April, the weak results to date have caused some worries that performance may have peaked. With interest rates rising, some investors could be tempted to shift their money out of the funds and into the bond market as a safe haven, said Antoine Bernheim, publisher of the U.S. Offshore Funds Directory. Funds specializing in everything from junk bonds to commodities have suffered poor results in recent weeks.
………………………………………