European Central Bank: Hedge funds did not likely “play a central role” in August’s mayhem
Dec 16th, 2007 | Filed under: Hedge Fund Industry Trends
In case you missed it (and we suspect you did unless you make a habit of reading monster 242-page publications like this) the European Central Bank’s December “Financial Stability Review” contains some interesting original analysis on the hedge fund industry. (See pages 46-60 of the report)
Acknowledging the role of hedge funds in August’s turmoil, the report points out that September’s rebound illustrated that “…other hedge funds stepped in to buy assets at bargain prices, thereby providing rather than consuming liquidity.” In fact, the ECB’s own analysis shows that only 5% of single-manager hedge funds invested directly in mortgage-backed securities and that YTD returns are tracking to historical norms (chart - right)
Nevertheless, continues the report, a “vicious circle could set in, whereby forced liquidations cause losses, margin calls from counterparties and investor redemptions, leading to even more asset sales.” And if high yield bonds and credit derivatives are added to the mix, then 20% of global hedge funds assets “could be affected by the recent turbulence.”
(Note that the chart at the right also shows the lack of return persistence in hedge funds. As the year progress, big year-one winners can’t seem to repeat. Thankfully, nor can big year-one losers.)
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