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article imagePossible run on hedge funds- investors want out

By Paul Wallis     Aug 15, 2007 in Business
This could get nasty. Hedge fund investors are bailing out of the market, spooked by the subprime situation. August 15 is the last date for notification to withdraw for the September quarter.
The mass exit will withdraw a very large amount from the hedge funds, leaving an unknown situation in its wake. From the sound of comments in this Reuters article, it’s like the tide is going out.
This is a precautionary move, going from funds to cash. It might pan out for the investors, if something with a better return shows up. The bailout means that the funds, however, will be down on cash. That may spell trouble if the funds are required to outlay any money in the following quarter.
The balancing act, in short, is looking potentially wobbly. There’s also a risk factor here in that hedge funds that borrow might well be short of cash for repayments. This underlines the level of insecurity that the subprime market has created. Loans taken out using subprime mortgages as securities aren’t looking good, and any hedge funds which bought them are likely to be under some real pressure.
That would be another reason for investors to get pretty nervous about hanging around in the funds to see what happens. So far nothing good has come of exposure to the subprime disaster. The scale of withdrawals could gut the funds, if that scenario applies.
As securities for loans, the subprimes aren’t exactly flavor of the month. Credit lines based on them can be expected to dry up. Money isn’t cheap any more, and it’s unlikely that lenders will be going out of their way to extend credit to funds which are likely to be considered effectively unsecured if holding subprimes. Don’t be surprised if the big banks start cutting off a few funds rather than risk any more losses.
The boom lending periods in any era frequently come unstuck. Housing booms are famous for creating problems, and this one has been no exception. It’s a fairly ironic situation. Some of the biggest booms in the finance industry have been based on credit, and the credit based on inflated asset values.
But when the plug gets pulled, the most likely place for the liquidity to go is down the drain.
More about Hedge funds, Subprime mortgages, Finance
 
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