City hedge funds head for domino collapse

[fedsron2us]

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.

http://www.timesonline.co.uk/article/0,,2095-1612390,00.html

This may just be the first hint of things to come.

[orwell]

1. 13 billion

is chicken feed. It is the dervivatives that many of these "risk takers" underwrite that may form the real problem.

Wait until the big NY money centers start hemming and hawing about derivative risk. Then you can get worried.

But in the end, the Fed will make it all go away with a sprinkle of fairy dust and a wave of the magic monetary wand.

And (some of us) will live ahppily ever after...

[fedsron2us]

2. Big landslides often start with small stones.

It is the knock on effect of forced selling of securities such as stocks and bonds that really pose the threat. If the market gives way then hedged positions that are viable today can quickly become untenable. I know that the financial authorities can pump in liquidity to prop up the market but when the real economy has turned sour this may only postpone the evil day. My hunch is that we will see some big hedge funds go down before this year is out and that the banking sector will suffer a nasty shock to its system.