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In keeping with the discussion a week back, apparently a rumor has been
circulating beneath the radar screen in the UK anyone else heard anything on
this?
don ewers
>>>>>>>>>>>>>>>>>>
Le Metropole Members,
Search BBC News Online
Friday, 24 August, 2001, 16:59 GMT 17:59 UK
Hedge fund threat
Some believe investors should be bailing out
of the US market
Remember the shock to the world's financial
system when the LTCM hedge fund faltered? The BBC's
Rodney Smith reports on rumours that another nasty
shock could be just around the corner.
A large hedge fund may be in trouble.
That is the story circulating a few days ago
in New York, London, Hong Kong and South Africa.
The trouble may have passed by, by now -
and it may not.
The derivatives business is very transparent at
one level - dangerously opaque at another. The effect
could be that another neutron bomb may be humming
away under the financial sector, potentially bigger
than the Long Term Capital Market (LTCM) hedge fund
crash of 1999.
The market rumour
Several days ago, the Reuters financial news
wire reported a rumour that a hedge fund was unloading
huge positions in the sophisticated debt and interest
rates swaps market.
Visionaries are convinced of a producer
and central bank conspiracy to cap the gold price
This is a liquid market; movements are usually
small as buyers readily find sellers and vice versa.
On this occasion though a 0.3% increase in spread
on a 10-year swap (that's a wide gap between bid and
offer prices by swaps markets standards) took the
market by surprise.
One trader described is at "astonishing", another described it as like
the Russian economic and banking
crisis in 1998.
Yet others were sceptical, said Reuters, pointing
out that hedge funds were invariably blamed for any
unexplained sudden or dramatic move in the derivatives markets.
The same day the market information service
Bridge News reported conditions as "dislocated for
a while". Not quite a disorderly market, but nearly.
The new players
The hedge fund business has grown exponentially
since the dot.coms imploded, as the fast buck brigade
has shifted from tech stocks to derivatives.
A result is that a market that was dominated by
a few big players until a couple of years ago, like
the Tiger Fund, Quantum and so on, is now heavily
populated by a multitude of much smaller funds.
Sometimes these are little more than computerised extensions of
day-traders.
TASS Research in the United States reports that
in the first quarter of this year, about $7bn new money
was invested in hedge funds - almost as much as the
whole of last year.
At least 100 new hedge funds have started since
January this year. New York hedge fund advisers, The
Hennessy Group, estimate that in the year to March,
hedge fund assets grew by a quarter to well over
$400bn, and the number of funds grew by a similar
proportion to a shade under 5,000.
Rich on money, short on experience
Old hands worry that the managers running these
funds are dangerously short on experience while handling billions of
dollars.
Most of them are not the rocket scientists
of the pioneering days in hedge funds, but fairly unsophisticated fast buck
makers. The same people
who precipitated the tech and dot.com bubble. They
could do the same with derivatives.
But derivatives are not stand alone stocks. A
derivates trade can shift whole markets.
Toxic waste
"Toxic waste" is what some US stock market -
and economy - bears (brokers worried about a market
downturn) like to call them.
There is a clan of American bears who
instinctively distrust "toxic waste" not for itself, but
for the people who manage it.
Some of them, like John H Mesrobian at
Constantinople Advisers, believe investors should be
bailing out of the US market, where the bubble would
be likely to burst first, and should be selling the
dollar and buying the euro, and gold.
It is the oldest hedge of all, but the gold
market is overrun with visionaries convinced that
there is a producer and central bank conspiracy to
cap the gold price.
Like the modern derivatives market, it can be
difficult to separate fact from fiction here too.
But these are the market professionals who
believe that a hedge fund Krakatoa may be about to blow.
The Federal Reserve would possibly not see it
in time, and unlike LTCM, when the US central bank
averted a disaster, it could be overwhelmed by the
sheer scale of a new crisis.
The everyone would be covered in toxic dust.
Le Metropole Cafe
All the best,
Bill Murphy
Le Patron
www.LeMetropoleCafe.com
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