Why Prices are Falling Everywhere

Hedge funds were the glamour toys of the investment world. They were risky, profitable inscrutable and unregulated. Billions were made by tycoons who traded and hedged industries, commodities and ultimately the entire world financial system. The games are over with the last gasp being $150 barrel oil which we were told was strictly demand driven. Blame for the financial collapse has been focused on the sub prime lending for homes and clearly that has been one component, but there is a lot of smoke out there that suggests that the blame belongs elsewhere.

Tomorrow Congress will huff and puff.

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From Times Online

November 12, 2008
Hedge funds lose $100bn in October
Miles Costello

As much as $100 billion was wiped off the value of hedge fund assets last month as panic-stricken investors rushed to withdraw their capital and the worst markets in living memory blew a giant hole in performance.

Investors redeemed about $60 billion of funds in October, while see-sawing market conditions accounted for the remaining $40 billion fall, according to EurekaHedge, the Singapore based industry research firm.

The drop in assets under management means that, worldwide, hedge funds probably manage about $1.6 trillion on behalf of wealthy individual and professional institutional investors.

This is down from a peak last year of about $2 trillion at the top of the hedge fund boom and comes amid predictions that a rash of funds will collapse before the end of the year.

Experts have predicted that as many as one in four hedge funds will be forced to shut within the next five to six weeks, with hundreds of billions eventually being wiped off assets.

Hedge funds have suffered particular trauma in the wake of the collapse of Lehman Brothers, the Wall Street investment bank that was a big backer of funds, in mid-September.

Many also found themselves the wrong side of AIG, the embattled insurer that has been bailed out twice by the US Government.

Almost all of EurekaHedge's main performance indices recorded steep falls in October, leaving some recording a loss of as much as 44.75 per cent for the year to date.

The research firm, which tracks hedge fund strategies worldwide, found that less than half of the funds held on its database made money last month, while a similar amount were in the red over the year so far.

EurekaHedge's composite hedge fund index, an indicator of the industry's performance as a whole, lost 3.3 per cent in October.

EurekaHedge said that this was a strong monthly performance when set against a 19.1 per cent drop in the MSCI World Index and an 18.3 per cent drop in the Reuters CRB index over the same period.

"This was against the backdrop of heightened expectations of a global economic slowdown and further stress in the credit markets, which led to a spike in volatility and harsh movements across asset classes," EurekaHedge said.

Now it is the Hedge Funds. "One of the greatest fiascos of banking in 100 years"

Some very bleak words from the Telegraph. It was a momentous calamity allowing the US home market to fall into bankruptcy and expecting a market solution of "letting them get their just desserts" as a policy. Some of us warned that the housing collapse should be contained but it wasn't and the consequences are becoming frightening. A policy of allowing bankruptcy courts to reset mortgages was sound then and probably the last line of defense now. This is a time for bold leadership without regard for public opinion, but we are reaching a point of no return.

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GLG chief Emmanuel Roman warns thousands of hedge funds on brink of failure
Emmanuel Roman, the co-chief executive of Europe’s biggest hedge fund GLG, has warned that thousands of hedge funds are on the brink of failure as the global economy contracts with unexpected severity.

By Rowena Mason Telegraph

Last Updated: 5:50PM BST 24 Oct 2008

Emmanuel Roman, of GLG Partners, said 25pc-30pc of the world’s 8,000 hedge funds would disappear "in a Darwinian process", either going bust or deciding meagre profits are not worth their efforts.

"This will go down in the history books as one of the greatest fiascos of banking in 100 years," said Mr Roman, who with Noam Gottesman, co-runs GLG, a former division of Lehman Brothers Holdings with assets of $24bn (£14.8bn). "There need to be some scapegoats, and the regulators are going to go hunt people. That will be good in the long run."

His views were echoed by Professor Nouriel Roubini, a former US Treasury and presidential adviser known for his accurate prediction of financial crises, who estimated that up to 500 hedge funds would fail within months.

Both men were speaking at the same hedge fund conference in London yesterday, and Prof Roubini said he would not be surprised if the US and other countries soon had to close their stock markets for more than a week to halt descent into "sheer panic".

The economist warned that the world is heading for a protracted recession that will end the US’s financial dominance.

"It’s the beginning of the decline of the US financial empire. The Great Depression ended in a massive war. I hope that’s not going to happen but it’s pretty ugly now," Prof Roubini said.

He added that turmoil over world trade, currency markets and debt is likely to cause geopolitical tensions between the Western world and emerging superpowers such as Russia, China and "a bunch of unstable oil states".

The conference saw analysts, economists and hedge fund managers discussing the possibility that global recession could now last two years on fears that government bail-outs and nationalisations have failed to stop the markets slumping.

"We’re now paying the price for the biggest asset and credit bubble in history," Prof Roubini said, advising investors to stay clear of risky assets and keep money in cash. "The bail-outs have not worked because the markets are no longer rallying, and the policy-makers have run out of options.
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The global financial meltdown accelerated this month, with the UK and US governments being forced to take stakes in some of the world’s biggest banks. Stock markets around the world have fallen sharply this month as investors’ concern switches to the impact on the wider economy.

"It’s like we’re walking blind in a minefield," said Prof Roubini. "Every situation has become risky and no one can trust each other. The banks are too big to be allowed to fail, but they’re also too big to save."

Research from Hedge Fund Intelligence (HFI) shows that despite one of the worst months on record for credit funds, US hedge funds alone still have $1.7trillion (£1trillion) in assets.