Sunday, March 16, 2008

Hedge Funds

Hedge funds take money from investors and make risky investments. They magnify the risk by borrowing short term funds. Some hedge funds borrow 20 times of their capital. This high leveraging is dangerous.

When their risky investments turn bad, they lost most of their investor's capital. They are not able to refinance the borrowings and had to repay them at short notice. They are required to liquidate their assets at depressed prices.

A few hedge funds had failed in this manner in recent months. This has caused the turmoil in the markets. It has become a financial crisis.

Lesson: Expect some regulatory controls over the use of leveraging by hedge funds in the future. In the meantime, expect the market to go through a lot of further turmoil, until the liquidity crisis is sorted out.
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1 comment:

Anonymous said...

For every big financial crisis, I seemed to hear hedge funds involvement, is it a coincidence?

Hedge funds are heartless entities that leverage on people's greed. Being speculators, they built their assets around other investors loss. When the market is going down, they short the market further, without holding any stocks.

Since the Fed started bailing out their own major banks, I think this lesson was not learnt and we are in deep, deep trouble. Obviously, the white knights for the rest of the banks also never learn anything too. Very disappointed that most financial regulators have forgotten this lesson from the last major financial crisis. So what if you are a SWF - end of being fish food for the sharks.

Hint: What do you think when a country starts printing more money to pay back the bad debts and flooding the global market with this new money? This is also a major currency used in gold, commodities and oil trading.

Good luck to people who are now speculating in currencies and commodities. :)

R.

March 17, 2008 3:03 AM

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