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When The 1 Trillion Of Hedgies Debt Hit The Fan

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TOP HEDGE funds around the world have debts of more than $1 trillion (£660m) on their balance sheets, secret data from US regulators show.

The findings were released by the US Securities Exchange Commission. The watchdog collects the confidential data under new rules as part of the Dodd-Frank Act.

The debts are mainly made up of securities like borrowed shares used for short selling. Link

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Interesting, I always thought Hedge funds were made up of a group of rich people / shareholders / investors and had lots of cash so that they could buy up companies and asset strip them.

I suppose hedge funds shareholders are liabilities, but it 'should' net out if liquidated, but it looks like that is not the case.

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Interesting, I always thought Hedge funds were made up of a group of rich people / shareholders / investors and had lots of cash so that they could buy up companies and asset strip them.

That's sort of right. A hedge fund is just an investment fund (like you might have in a shares ISA or pension fund). However, a hedge fund is allowed to use high-risk techniques to improve return on investment for the clients. The easiest way of improving return is leverage - i.e. investing borrowed money.

Client deposits £1 million. Fund manager takes £1 million, and borrows another £1 million on the money markets (e.g. at 2% interest). Invests the £2 million in high dividend stocks paying 5% dividends. Assuming the market doesn't collapse, the client is now looking at getting an income of 8% (£2 million * 5% - 2% loan interest) on their investment, with the opportunity to make even bigger gains from capital growth (or huge losses from fall in share values).

This will show up as £1 million of debt on the hedge fund's balance sheet. Some hedge funds may use much higher leverage, depending on what they are buying. A fund investing in currencies or government bonds may have leverages of 5:1 or possibly more.

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TOP HEDGE funds around the world have debts of more than $1 trillion (£660m) on their balance sheets, secret data from US regulators show.

The findings were released by the US Securities Exchange Commission. The watchdog collects the confidential data under new rules as part of the Dodd-Frank Act.

The debts are mainly made up of securities like borrowed shares used for short selling. Link

The guy Knows what he's talking about. $1 trillion (660m)???????

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TOP HEDGE funds around the world have debts of more than $1 trillion (£660m) on their balance sheets, secret data from US regulators show.

Did I miss a big day on the foreign exchange markets? $1 trillon = $1,000 billion = $1,000,000 million.

That's about £650 billion.

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1 Trillion does not seem a lot, based on most hedge fund models. Be surprised if it wasn't much more than this on a short term basis....

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Interesting, I always thought Hedge funds were made up of a group of rich people / shareholders / investors and had lots of cash so that they could buy up companies and asset strip them.

I suppose hedge funds shareholders are liabilities, but it 'should' net out if liquidated, but it looks like that is not the case.

More debt leverage = bigger fees

Until it blows up. By which time your 2+20 will have secured your retirement anyway.

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Interesting, I always thought Hedge funds were made up of a group of rich people / shareholders / investors and had lots of cash so that they could buy up companies and asset strip them.

I suppose hedge funds shareholders are liabilities, but it 'should' net out if liquidated, but it looks like that is not the case.

]

IMF The (sizable) Role of Rehypothecation in

the Shadow Banking System 2010

'Rehypothecation occurs when the collateral po

sted by a prime brokerage client (e.g., hedge

fund) to its prime broker is used as collatera

l also by the prime broker for its own purposes.

Every Customer Account Agreement or Prime Brokerage Agreement with a prime brokerage

client will include blanket cons

ent to this practice unless stated

otherwise. In general, hedge

funds pay less for the services of the prime

broker if their collateral is allowed to be

rehypothecated. '

MBS anyone?

Edited by Sancho Panza

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