'Hedge fund collapse is on the way'

[id62000]

'Hedge fund collapse is on the way'

By Steve Johnson

Investors will withdraw $500bn (£245bn, €355bn) – a quarter of the asset base – from hedge funds in the next year, leading to the collapse of a "large number" of hedge funds.

So predicts Giles Conway-Gordon, managing partner of Cogo Wolf, a San Francisco-based fund of hedge funds, who believes investors are increasingly dissatisfied with industry performance, and that computer-driven quantitative hedge funds now simply run too much money to make healthy returns.


"I don't think it [the hedge fund industry] can support $2,000bn of assets. I think we are going to see large numbers of hedge funds go out of business, and rightly so," he says. "Hedge funds are supposed to avoid losses when things are bad, but there are very few that can break even then. I think a lot of them are not earning their keep.

"There's a hell of a wave of money, say $500bn, coming out of hedge funds over the next year. There is going to be more of a focus on demonstrable results and track records that do not rely on 10-12 times leverage.

[zapper]

"There's a hell of a wave of money, say $500bn, coming out of hedge funds over the next year. There is going to be more of a focus on demonstrable results and track records that do not rely on 10-12 times leverage.

I feel, 10 to 12 times leverage is really very high for Hedging!. Most companies prefer 1:1 to 1:5 leverage only. Leverage is very important factor to be considered!.

[id62000]

Originally Posted by zapper

I feel, 10 to 12 times leverage is really very high for Hedging!. Most companies prefer 1:1 to 1:5 leverage only. Leverage is very important factor to be considered!.

It's the selling point of the bank. If one says they'll provide 10:1, another'll say they'll give 12:1. And with a high leverage, if the leverage securities go down by, for eg., 5%, they can lose nearly 50% of the initial capital.

Amaranth's two main hedge funds lost more than $6.5 billion, or 70 percent of their assets, in September, in part because its trades were leveraged.

To prevent these types of losses, the better firms hedge their long positions with short positions so that if there's a fall, they will nullify themselves out.