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jonpo

Investment Banks Launch The Smackdown On The Hedge Fund Barbarians

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Maybe its self-preservation.

At this stage the hedge funds may want to borrow money to short the crap out of the companies they are borrowing from (and all their pools of investments). :lol:

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"harder to finance their leverage" - yes, but why was it so easy in the first place????????????????

Thats easy, same as your bank manager/account jockey pushing you to borrow money. They get comissions, and the bank they work for, getting the money back and interest has been a free ride for many years, now they panic and see risk. Suspect your own banks staff will be getting messages from above soon along the lines of ' If you lend money and we dont get it back, your out!''

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Maybe its self-preservation.

At this stage the hedge funds may want to borrow money to short the crap out of the companies they are borrowing from (and all their pools of investments). :lol:

Very plausible. The strange and byzantine involvement of hedge funds in the ongoing ABN-AMRO takeover saga is a case in point.

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Very plausible. The strange and byzantine involvement of hedge funds in the ongoing ABN-AMRO takeover saga is a case in point.

Hedge funds’ dirty tricks offer to Barclays

A GROUP of hedge funds has secretly approached Barclays to ask it to help torpedo Royal Bank of Scotland’s €71 billion (£48 billion) consortium bid to buy ABN Amro, the Dutch bank.

Barclays is mounting a rival takeover bid for ABN. The hedge-fund plan, which was rejected, could have secured it victory in the battle. The revelation provides a glimpse into the dirty tricks being used by hedge funds and other traders to make money out of the world’s biggest-ever deal in the financial-services sector.

The hedge funds wanted Barclays to acquire shares in Fortis, the Belgian bank that is part of the RBS consortium. Barclays would then have used the shares to vote against a proposed £8.7 billion rights issue by Fortis to finance its share of the ABN takeover. The fundraising will be voted on by Fortis shareholders on August 6.

Fortis is viewed as the weakest link in the RBS consortium. If the rights issue is blocked, it would derail the bid and remove the uncertainty from the Fortis share price. If this happened, a number of hedge funds stand to pocket big gains from an expected sharp rise in the Fortis share price, which has fallen 15% since April when the Belgian bank said it was a member of the consortium bid.

A source close to the consortium said: “This Fortis EGM is the absolute linchpin of the deal at the moment. If this is scuppered we’re all in trouble.”

A Barclays spokesman confirmed the request. He said: “We were approached by a number of hedge funds looking to get some support to vote down the rights issue. We declined and said we were not interested in that sort of thing.”

One source said: “Fortis is panicking that its EGM is going to be sabotaged for reasons not to do with the deal. There’s a real possibility it will delay the meeting until at least after the dividend payment in August and until it can regain control of what’s going on.” It is not illegal for hedge funds to manipulate share prices.

One banker said: “It’s a legitimate strategy; there is nothing improper, but it is unpleasant.” Thirty per cent of the Fortis register is already in the hands of hedge funds. In addition to this, almost 14% of Fortis’s stock, valued at about €5.5 billion, is now being “borrowed”, according to traders using Data Explorers, one of the few systems that track global stock lending.

Traders usually borrow stock to cover “short” positions, or bets that the share price will rise. But because borrowing stock also delivers voting rights at a fraction of the cost, suspicions have been raised that groups of traders are trying to manipulate the outcome of the ABN takeover.

One trader said: “The demand to borrow Fortis [shares] is at an extreme level at the moment. Usually European banks have about 3% or 4% of their stock on loan. Fortis has got at least three times this much.”

Funds have taken opposing positions. Some have “shorted” Fortis shares, while rivals have “long” positions in ABN and therefore need the rights issue to succeed. Concerns about the EGM vote have been further raised as volumes of Fortis stock in the options market also soared.

A trader said: “We think there’s a further 5% of Fortis stock being in effect borrowed at the moment.

Rather than borrow stock that can be recalled, traders can buy the physical shares and then use a put option to sell them again, which delivers secure voting rights at a fraction of the cost.”

Last week Fortis instructed brokers at Merrill Lynch to ring shareholders and persuade them to recall stock that could have been lent out to the hedge funds. Under market rules, institutions place the shares they own with stock-lending desks at banks to gain incremental income on otherwise idle shares, but if they recall the stock, the borrower must return it in three days.

The picture is complicated by Fortis’s dual listing. One set of shares, those listed in Belgium, pay a dividend on August 14. Hedge funds may be borrowing those shares just to benefit from the payment. That does not apply to the Amsterdam-traded shares. An estimated €3.3 billion worth of the Belgian shares have been borrowed, and an estimated €2 billion of the Amsterdam shares.

An insider said: “ Some of the brightest traders have placed some of the most complex bets on scenarios that boggle the minds of ordinary City folk.”

There is also a suspicion that Vega, a Madrid-based fund manager, with close links to Santander – another member of the RBS bid – is shorting Barclays shares. Separately, the ABN board is expected to drop its recommendation of the Barclays bid and take a neutral position.

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Very plausible. The strange and byzantine involvement of hedge funds in the ongoing ABN-AMRO takeover saga is a case in point.

The hedge funds are a disease. The central banks have provided the ideal growth environment for them with no thought whatsoever of the effect of the blight that they will cause. They are a rule unto themselves and can basically stick fingers up at all and sundry. Have no doubt they will play a large part in bringing many financial sectors/systems to their knees over the years to come.

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The same thing happened in 1998 after LTCM and the Russian bond crisis. Upping margin requirements is a standard prime brokerage thing to do when there's trouble in the air. Most hedge funds use leverage to amplify their allegedly absolute returns - if you can make 2% return regardless of market conditions without leverage then, if you can gear up 10 times, you can make 20% minus funding costs instead. The irony is of course, that upping the margin requirements is quite likely to bring about the very thing that the banks fear. As the margin requirement rises, the hedge funds have to start liquidating things to pay over the cash and the stuff they're most likely to liquidate first is the least dangerous parts of their books. If there is a more general tightening of margin requirements, expect to see more funds shutting down without necessarily blowing up - reduced leverage = reduced profit = customers with itchy feet.

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