SEC: Must Be Ready for Hedge Fund Crisis (Reuters)

[Up2Late]

Sat Jan 29, 2005 11:28 AM ET

By Ben Hirschler

DAVOS, Switzerland (Reuters) - U.S. financial regulators need to be ready in case of a crisis in the hedge fund industry and will amend rules if necessary, the head of the Securities and Exchange Commission said on Saturday.

Hedge funds have exploded in popularity in recent years, amid concerns that their use of leveraged positions could fuel sharp market disruptions and leave investors exposed.

"There is no way we cannot take a look at a $1 trillion industry," SEC Chairman William Donaldson told Reuters on the sidelines of the World Economic Forum in Davos.

"Two years down the pike when something blows up, and it surely will, the SEC would be really nailed for not being on top of this."

(more at link)
<http://www.reuters.com/newsArticle.jhtml?type=businessNews&storyID=7473783&src=rss/businessNews>

(What I want to know is, should a statment like,"...Two years down the pike when something blows up, and it surely will..." set off a few alarm bells?)

[salin]

1. kick for anyone who can give more info

as to what the implications of this might mean.

[Up2Late]

3. I REALLY don't like that quote...

"...Two years down the pike when something blows up, and it surely will..."

Sounds like the Hedge Fund "Fat Cat's" have a plan to fuck with the market, and even though it won't hurt me (much), that would be a very bold statement.:evilfrown:

It reminds me of how * says Soc. Security "WILL" be broke in 10-15 years, Is he and his buddies going to "make" that happen?:grr:

[satya]

2. Kick. n/t

[Up2Late]

4. Here's more, as to what a Hedge Fund is.

What is a Hedge Fund?

A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell distressed securities, trade options or bonds, and invest in just about any opportunity in any market where it foresees impressive gains at reduced risk. Hedge funds often hedge against downturns in the markets, which is especially important today with volatility and anticipation of corrections in overheated stock markets.
:smoke:
(more at link)
<http://www.magnum.com/hedgefunds/whatisahedgefund.asp>

[TahitiNut]

5. I wouldn't trust William Donaldson as far as I could thrown him ...

... or (especially) his former partner Richard Jenrette.

[mulethree]

6. leverage

Here's a pretty good NYT article on the LTCM bailout in 1998
http://marshallinside.usc.edu/dietrich/NYTimesLTCM2.htm

Basically, a hedge fund takes money from 'expert' investors - banks, trusts, other sorts of funds and rich folk. They build up a staff of mathematicians, economists and build super-duper computer models of economies and markets. They analyze long strings and networks of investments that cross markets. Their models try to account for unusual inter-market interactions which don't have the usual market efficiencies because they are not part of any normal business deals.

They make huge complex multi-part deals that involve scores of transactions as part of one investment. Then they leverage as many pieces as possible - basically borrowing money cheaply and incorporating it into the deal. So one deal might involve a billion dollars plus another 5 billion in leverage, and then make or lose $100 Million in a few weeks. If they can 'win' on 12 out of 20 deals in a year, then they have made $400 million on a $1Billion investment, and earn a 40% return. They might have 50 such deals going at any given time - $50 Billion leveraged to $300 Billion.

But when something goes wrong, it can affect a dozen of their 50 deals and in turn jeopardize all 50 of the deals and BOOM you have $300 Billion worth of (to anyone else) nonsense trades all going bad at the same time in markets all over. Throws all the markets off kilter and messes up the big deals of other hedge funds and pretty soon you have a multi-trillion dollar mess and the companies who provided the leverage are caught up in it.

So basically, a bunch of rich folk and money businesses - who should know the risks - will have made a bad bet and should loose their shirts. But they have entangled so many other companies and jeopardized entire markets, that they become 'too big to fail' and have to be bailed out. They get their 40% returns for years, but when the inevitable 300% loss comes along to balance things out, they are protected - must be protected because they've risked entire economies and markets.

Thing is that they're investments are so esoteric and proprietary, that they should not be able to get any leverage for their trades at all. No bank is really able to judge the risk involved and hence should not be providing credit for the leveraging.

[Voltaire99]

7. Nice comment (n/t)

[ckramer]

8. If shorting was disallowed, hudge funds would be gone in a week or two

without the Congress doing anything.

[Up2Late]

9. You REALLY think they would do that voluntarily?

Give up Shorting, I mean. :crazy:

I don't.:kick: