James Turk: The quest for sound money in New Hampshire

Section:

City Hedge Funds Head for Domino Collapse

Peter Koenig and Louise Armitstead
The Times, London
Sunday, May 15, 2005

http://business.timesonline.co.uk/article/0,,8209-1612390,00.html

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.

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