The hedge-fund industry is reeling from its worst crisis in a decade as banks are demanding more money pledged to support outstanding loans...
The hedge-fund industry is reeling from its worst crisis in a decade as banks are demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.
Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders — staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market — raised borrowing rates as much as tenfold with new claims for extra collateral.
While lenders are most unsettled by credit consisting of real-estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasurys, considered the world’s safest securities, because of the price fluctuations in the bond market.
“If you have leverage, you’re stuffed,” said Alex Allen, chief investment officer of London-based Eddington Capital Management, which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won’t get their money back.
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“There has to be more in the next weeks,” Allen said. “There are people who have been hanging on by their fingernails who can’t hold on much, much longer.”
Carlyle Capital, the debt-investment fund started by private-equity firm Carlyle Group, was suspended from trading in Amsterdam on Friday after it couldn’t meet margin calls, and its banks seized and sold assets.
Carlyle Capital said Monday that it had asked lenders to halt further liquidation of collateral worth as much as $16 billion while the two sides discuss ways to repay the debt.
The Carlyle fund, which invests mainly in triple-A-rated mortgage securities issued by Fannie Mae and Freddie Mac, has received $400 million in margin calls, and some lenders started to liquidate collateral for $5 billion of debt.
“Banks are reducing exposure anywhere they can and the shortest way to do that is to cut leverage,” said John Godden, chief executive officer of London-based hedge-fund consultant IGS AIS.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
The managers that trade fixed-income securities generally borrow money through repurchase agreements, or repos. In a repo, the security itself is used as collateral, just as a homeowner puts up the house as collateral for a mortgage.
“It’s not a question of prime brokers deciding which firms live and which don’t,” said Odi Lahav, head of the European Alternate Investment Group at Moody’s Investors Service in London. “They’re trying to manage their own risk. There’s a Darwinian aspect to survivorship in this industry.”
Bloomberg News reporter Annette Weisbach in London contributed to this story.