Hedge Fund Collapses

[NinjaPigeon]

Just saw a segment on the news about this. Unbelievable to think that much money can disappear in a single week.

Hedge Fund's Collapse Met With a Shrug

Do you guys think this will have a noticable impact on the market overall? Could we see some new laws come out to address these types of things?

 

[Brat]

Na.. what goes up comes down.  This manager rolled for snake-eyes and lost.  Too bad the customers can't get last year's bonus back.

 

[youbet]

Sounds like investors should have understood the risk level they were assuming when they bought in:

"The size of the positions that Amaranth was letting Hunter take was no secret. It was disclosed to investors, such as major investment banks that included stakes in Amaranth as part of their "funds of hedge funds."

I wonder if the coin had come up the other way if investors would have been crying about huge profits?

 

[Texas Proud]

I wonder if the coin had come up the other way if investors would have been crying about huge profits?

Of course not... they got a great return the previous year... and the article did not say that they were crying even at this...

 

[tryan]

Sounds like investors should have understood the risk level

Weeeell, you only know what you're told .... the real risk is in the leverage.

Just last week, New York Fed Governor Timothy F. Geithner expressed concern about the ability of hedge funds to take on a lot of leverage without disclosing it.

 

[FIRE'd@51]

The problem I have with hedge funds is that the name is basically a misnomer. In the "old days", hedge funds primarily did arbitrage-type trades. In the past 10 years most have become diversified portfolios of a bunch of leveraged bets.

 

[Brat]

My concern is about the folks who are lending the fund the money. They get greedy for their fees and overlook the risk to their business (and stockholders). IMHO "insured" (such as FDIC) should be prohibited from playing in that park.

 

[brewer12345]

My concern is about the folks who are lending the fund the money.  They get greedy for their fees and overlook the risk to their business (and stockholders).  IMHO "insured" (such as FDIC) should be prohibited from playing in that park.

Generally, the ones lending money to hedge funds are prime brokerages, which are housed within the likes of Bear Sterns, Goldman Sachs, etc. This is not money loaned out by the local savings & loan.

 

[justin]

While we're on the topic of spectacular hedge fund collapses, let me plug a good book I read recently (and learned about here on this forum):

When Genius Failed by Roger Lowenstein

The story of the rise and fall of Long Term Capital Management. Not overly financial/technical. It presents the "behind the scenes" happenings of LTCM and what was going on. The mania that existed prior to the fall.

 

[Nords]

When Genius Failed by Roger Lowenstein
The story of the rise and fall of Long Term Capital Management.

What he said-- great book!

 

[justin]

What he said-- great book!

Nords, thanks for your recs and reviews on books - I probably got the Lowenstein rec from you!

You are keeping my reading list populated. I've got a couple of the Alexandra Robbins books coming up soon on my "to read" list.

 

[Arif]

When Genius Failed by Roger Lowenstein

The story of the rise and fall of Long Term Capital Management. Not overly financial/technical. It presents the "behind the scenes" happenings of LTCM and what was going on. The mania that existed prior to the fall.

Very good book. The part I thought was fascinating was that some of the same brokerages that were lending to them on credit were also betting against their trades toward the end. The amount of leverage they were allowed to use was astonishing as well.

 

[FinanceDude]

Generally, the ones lending money to hedge funds are prime brokerages, which are housed within the likes of Bear Sterns, Goldman Sachs, etc.  This is not money loaned out by the local savings & loan.

Interesting...................however LTCM was run by Nobel Prize guys in finance, so it still can happen.

Brewster, when do you think the feds will start regulating hedge funds? I think it will happen in the next ten years, now that there's over a trillion dollars in them.

 

[brewer12345]

Brewster, when do you think the feds will start regulating hedge funds?  I think it will happen in the next ten years, now that there's over a trillion dollars in them.

Depends on what you mean by regulation. Hedge funds already have to comply with lots of SEC regulations, etc,. You mean mutual fund-type regulation? Never. Somewhere in between what there is now and mutual fund type restrictions? Maybe within 10 years.

 

[FinanceDude]

Depends on what you mean by regulation.  Hedge funds already have to comply with lots of SEC regulations, etc,.  You mean mutual fund-type regulation?  Never.  Somewhere in between what there is now and mutual fund type restrictions?  Maybe within 10 years.

Agree.............mutuals are "marketing to the masses" so they need more regs. Alternative stuff like hedge funds, private placements, etc, are catering to affluent investors so there's fewer people involved...........

On a side note, I recently read there are about 700,000 registered securities folks in the US. Sounds like a lot, but I'll bet well over 70% of those are Series 6, not 7, or 3, or RIA, or whatever.