Hedge Funds and Global Liquidity
June 24th, 2007Oh dear it seems as if Bear Stearns may be in a little trouble as it coughs up $3.2bln to support one of its hedge funds exposed to the US subprime market.
This is not good news at all but the market has been through this before with the Long Term Capital meltdown in 1998 and of course the 1995 collapse of Barings Bank by Nick Leeson. So it won’t be in complete panic but this is a big move to Bear Stearns and perhaps just a taste of what can go wrong when the music stops.
Hedge funds are heavily leveraged and so when a big move goes against them the losses can be astronomical. In theory risk models are supposed to flash warning lights at set points but the reality is that these models are not foolproof (after all we designed them) and traders can often disguise bad positions. And from my experience all risk is underpriced since it is based on average volatility and not the heavy meltdowns that come with increasing regularity.
The last 10-15 years has seen a huge amount of money created by the worlds’ banks and much of that finds its way back into the financial markets to be invested or used as speculative margin. The numbers are so huge that the Fed in the US has decided it would rather not publish money supply numbers anymore.
So when the market goes into reverse it can cause major losses which have knock on effects around the whole system. It will be interesting to see how this situation pans out but at some point there will be a serious contraction unless new demand can be conjured up.
Tags: banking, bear stearns, central banks, debt, economics, federal reserve, hedge funds, money supply, mortgage, Uncategorized
June 25th, 2007 at 4:45 am
Is this a Black Swan then?
I liked this recent comment on Mark Cubans’ blog
“I’m a big believer that whenever you do a business deal with people you don’t know, particularly buying and selling stocks, you always look for the sucker. If you don’t see the sucker, then you are the sucker.” where he is writing about hedge funds
http://www.blogmaverick.com/2007/06/21/hedge-fund-ipos-individual-investors-should-be-careful/
June 25th, 2007 at 4:54 am
Also found these notes by Nassim Taleb
http://www.fooledbyrandomness.com/notebook.htm
A fascinating read eg.
That evening I met Mandelbrot at dinner, a meeting which should remain one of the most important episodes in my life (I finally found someone to talk to about randomness). I continue with an excerpt from The Black Swan.
When I first met Mandelbrot I asked him why an established scientist like him who should have more valuable things to do with his life would take an interest in such vulgar topic as finance. I thought that finance and economics were just a place where one learned from various empirical phenomena and filled up one’s bank account with f*** you cash, before leaving for bigger and better things. Mandelbrot’s answer was: “data , a goldmine of dataâ€. Indeed, everyone forgets that he started in economics before moving onto physics and the geometry of nature. [Chap 16]
June 27th, 2007 at 10:50 am
I commented on Mark’s blog about the IPO but i don’t think its a black swan, more the endgame of a 14 year credit bubble. Hedge fund IPOs are really not an investment for the sane or faint hearted.
It probably tells us we are close to the top of the stock market.
June 27th, 2008 at 4:15 am
[...] in the Dow the market has come to its senses and started bailing again. It’s a year now since Bear Stearns stumped up $3bln plus to bail out one of its funds thereby signalling the start of the [...]