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Us Hedge Funds Going Bust, It's All Unravelling


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I've been reading all this with interest - do you all see a similar situation to the Wall Street Crash arising? I know the financial areas will be different etc but will the end result necessarily be very bad?

If we can 'see' this coming is there nothing that can be done to prevent it? Forgive the simplicity of my questions.

Imho. Who knows. Anything is possible is the lesson of History.

However, I do believe that the current Governments will be aware that their populations would not now accept the destitution that afflicted their forebears, whatever level of society.

Governments would have to then become the "employer of last resort".

A Keynesian model that some might argue Gordon Brown is already indulging in.

You might argue that military spending in the USA is fulfilling the same function.

Whether that could alleviate the massive problems that would arise is an unknown.

You only have to look at the social security budget for the UK, let alone all the other public sector liabilities to see that such an event could be catastrophic.

Sorry.

Others here may be able to quantify things more scientifically.

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well for what it's worth, the man says a correction is long overdue. he stopped buying equities about 6 to 9 months ago saying they were ridiculously over-valued. he can't find any value in the US or UK stock market - anywhere - he's searched and searched and searched. he's still holding stocks - but they're long term buys which he'll continue to hold during a downturn because they're not in risky businesses. he didn't buy a single dot-com stock and was laughed at by his friends for 3 years, but in the end he ended up much richer. one of his friends lost everything, his house, his wife, his kids, his job - bankcrupt.

the man's view is that he can't understand why things have gone on and on like this for so long. he's never seen a market like it - something also said by Philip Green recently.

but things could bubble along for a while longer - a correction would be precipitated by a 'tail-event' - which is either a terrorist attack, or else a few big companies going bust. but it needs to be something serious.

things must get worse before they get better and he says the longer it goes on, the worse it will be when it all finally shakes out.

he doesn't think nice things are going to happen in the city "only when the tide goes out do you see who's been swimming naked" is one expression recently used and another of my friend's in the city thinks redundancies will begin in earnest around xmas time.

you need the economic pain first, then the job losses, and then that's the final nail in a very inflated, but now stagnant and somewhat naked looking property market.

until the job losses start happening, the housing market won't really slide.

will it be as bad as 1929. i don't think so. economic cycles are much quicker now, banks and business work together to ease the pain. everyone knows so much more than they used to about economics and markets. so i don't think it will be quite that bad. Dr Bubb - what do you think?

the US and China has a lot to do with what happens next... and what happens to us too.

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On Monday October 19th 1987 fifty billion pounds or ten per cent, was wiped off the value of public-quoted companies in London by a tidal wave of selling that began when dealers reached their desks at 7am and never stopped.

I'd like to interject with a dumb question at this point if I may.

If all these traders were busy selling at the same time, who were they selling them too?

Who continues to buy while things are crashing?

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Guest Charlie The Tramp
I'd like to interject with a dumb question at this point if I may.

If all these traders were busy selling at the same time, who were they selling them too?

Who continues to buy while things are crashing?

I think you will find the volume of shares which the brokers are instructed to sell by their clients crash in price when there are no buyers, similiar to the housing market. Maybe the Investors on the forum can explain more fully.

When they hit the bottom, nice gentlemen like Warren Buffet step in and buys to put them out of their misery and losses. <_<

Edited by Charlie The Tramp
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I am slowly beginning to get the grasp of the big finance debates that take place on here.

Even at level simpler than derivatives etc, it seems that your average high street bank earns its money not so much from lending at a higher rate than the rate it pays on its deposits (as I had naively believed for some time), but on taking on the risk in injecting money into the economy through fractional reserve banking (is that the right term?).

The whole banking system seems to be built not on looking after people's money and charging interests on loans, but on risk management.

With regards to the more complex bits discussed above, it does seem frightening how much "group think" goes on in these investment houses. Any danger of a psychologist like me being paid through the nose to alert people to their glaring psychological weaknesses? ;)

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When you boil them down to the core, derivatives - insurance - gambling are the very same thing. They are just a mechanism for allocating risk.

In fact, prior to the Financial Services Act 1986, a derivatives contract would have been void as a gambling contract under the Gaming Act 1835!

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Something seems to be missing. There are rumors about hedge funds in trouble. There is talk about carnage in the high grade market, but there is very little concrete information about what is happening. “Business as usual,” is the official word from most institutions, but there are signs of stress in the derivatives market.

Same today, DrB. These hedge fund rumours have been circulating all day, and yet there still hasn’t been any real info to substantiate any of the whispers.

I’ve been watching the US Treasury 10-year note rise steadily throughout the day. The yield is now down to 4.10%, and this is on a day when it was announced that U.S import prices rose by 0.8% in April, twice the market expectation. Al Greenspan must be wondering what the heck’s going on.

I guess one possibility is that investors are simply spooked by the possibility of a credit derivatives fallout, and have decided to park their money safely in Treasuries for the weekend. If some Sunday paper has got hold on some concrete story on hedge fund losses, then you don’t want to be holding the baby on Monday morning.

This has been a very strange week.

Oh, and the Dow is now tanking again. It was up nearly 50 points just after lunch (US time). Now it’s down nearly 100.

Edited by FreeTrader
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In a way I found it quite comforting today to read Stephen Roach’s latest missive:

http://www.morganstanley.com/GEFdata/diges...ri.html#anchor0

If the chief economist of Morgan Stanley is able to admit that he simply doesn’t understand the intricacies of derivatives, then I don’t feel quite as bad about being relatively clueless about them either.

There are members of the HPC forum who are clearly completely at ease with the various flavours of derivatives (DrBubb, spoon, Sledgehead etc.) but, like Roach, I just can’t get my head around them. I guess you’ve got to actually be involved with trading derivatives to fully understand their mechanics, rather than trying to analyse them at an intellectual level.

This might seem a totally irrelevant point as far as the housing market is concerned, but bear in mind that in the last few days we have had the FSA and the Fed simultaneously expressing concerns about systemic risk with regard to hedge funds and derivatives. To my mind it’s more than coincidence that these bodies have simultaneously decided to look closer at this market. Something has prompted them to raise their concerns.

Whether we’ll ever find out what has set the alarm bells ringing remains to be seen.

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derivatives is basically like spread betting

you bet anything up or down, you bet the right way you win you bet wrong you lose.

what people find confusing is that this bet ie hedge can be done on so many things, derivatives were first used as a way for users of commodities to ensure fluctuations in price of the desired commodity didint increase so much as to make it uneconomical to purchase.

from this point it was found that anything could be hedged this way, such as currency,company credit, bonds ect ect.

so all derivatives is basically is spread betting on which way anything will go.

example

HSBC give 100 million to general motors as a loan at 6%, it then can sell the risk of this loan to anyone it wishes so it keeps 50% of it and sells 50 million of the debt to RBS

Now depending on the fortunes of general motors id the company does well then the % over base rate will drop and if the company does bad it will increase.

Now think of 1000s of diffrent company loans out there, add in bonds,shares,currency,orange juice and whatever else you can think of. and each of these can be bet on to increase of decrease.

you could say buy that 50 million GM loan hoping the % yield will rise to make you profit you can also sell it hoping it will fall and profit to, but pick the wrong way long or short ie buy or sell and you lose money.

now that 50 million loan can be bought for 5 million cash due to gearing, this means that now you have only paid 10% so a 10% swing in the wrong direction wipes you out, but it also means pick the right way and you will make money on the whole 50 mill movement even though you only bought for 5 mill.

ie you increase the risk with gearing becuase of the smaller swing if you had paid the full 50 mill them it would need to drop 1005 to wipe you out.

so the less you pay the greater the risk but the chance of higher potential profits.

So say your a guy sitting at a desk in a office and your looking to make some money, you have 5 mill to spend

well you could buy shares with this or buy bonds or buy currency or whatever on your own opinion of which way the wind will blow

you do this by buying contracts to buy or sell at a certain date

today say 1 usd = 1.90 sterling, but due to the deteriating situation in the usa you feel the usd will get weaker.

then you can short the dollar ie buy a futures contract which basically means at a fixed future date you believe the dollar will be cheaper hence recieving the diffrence between the buy price today and the price you sell at, this price will change daily right up to the point the contract becomes payable so you can jump in at any time.

now all derivitives do is allow you to use gearing so instead of buying the 50 mill of future contracts you can buy 500 mill of them with your 50 mill, hence every chance in price will be much more significant ie 1 point becomes 10 points.

but the trouble is you loses are also 10 for 1.

so thats all its about its basically spread betting with gearing on many diffrent financials and commodities.

hope that helps to understand it in layman terms and also the risks involved.

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Calm down folks, everything will be fine. Hedge funds come and go but they are a permament fixture in finance, I guarantee that. The best way to invest in hedge funds is through an experienced advisor who can avoid the landmines out there. No doubt about it, this credit cycle will cause casualities. It always does, and I agree that it will be especially pronounced because of how long money has been free in the USA. Luckily my firm avoided synthetic CDO funds as we could not fully understand the risks and ultimately concluded regardless of how it was sliced and diced, it was a leveraged long trade. Nevertheless, contagion is possible and it will affect all asset classes should it happen.

However, if hedge funds fall, you can bet that traditional investments will be crashing 3x as hard around them. So in the end, I'll take a good fund of funds portfolio over the best mutual funds any day of the year.

My husband works in the City in derivatives.

The rumour going around in the last few days is that some hedge funds in the US are about to go under.

They have big exposure to GM and to Ford, and both of these companies are heading towards chapter 11 bankruptcy in the next 1 to 3 years.

Consequently, any commercial investor with derivative exposure to GM and Ford is looking to get out. It's like a game of poker, you want to get out at the highest price, but you don't want to panic the market with a big sale and spook everyone, setting off a big panic. So will it be a slow burn, or a sudden slide for GM and Ford? No one is quite sure but the rumours are all running around right now and everyone wants to dump any kind of holding they have in these companies, be it equity or debt.

When investment companies start going bust, you know it's the beginning of something bigger...

Just wanted to add this to HPC, as all these bad bits of news brings the property crash closer in time.

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  • 3 years later...
My husband works in the City in derivatives.

The rumour going around in the last few days is that some hedge funds in the US are about to go under.

They have big exposure to GM and to Ford, and both of these companies are heading towards chapter 11 bankruptcy in the next 1 to 3 years.

Consequently, any commercial investor with derivative exposure to GM and Ford is looking to get out. It's like a game of poker, you want to get out at the highest price, but you don't want to panic the market with a big sale and spook everyone, setting off a big panic. So will it be a slow burn, or a sudden slide for GM and Ford? No one is quite sure but the rumours are all running around right now and everyone wants to dump any kind of holding they have in these companies, be it equity or debt.

When investment companies start going bust, you know it's the beginning of something bigger...

Just wanted to add this to HPC, as all these bad bits of news brings the property crash closer in time.

1-3 years you say.

Unlikely to happen, GM and Ford are too big to fail. The hedge funds will have covered themselves which

is the point of hedging so derivatives are safe anyway. The debt is highly rated and the share price is

only going to go up.

:P

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1-3 years you say.

Unlikely to happen, GM and Ford are too big to fail. The hedge funds will have covered themselves which

is the point of hedging so derivatives are safe anyway. The debt is highly rated and the share price is

only going to go up.

:P

"1-3 years you say. Unlikely to happen, GM and Ford are too big to fail"

Agreed, it is now 2009

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1-3 years you say.

Unlikely to happen, GM and Ford are too big to fail. The hedge funds will have covered themselves which

is the point of hedging so derivatives are safe anyway. The debt is highly rated and the share price is

only going to go up.

:P

The OP was made in 2005 !

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Forgive my ignorance but I don't know how serious that would be.

Incidentally, I read a fascinating biography of Rockefeller a few years ago and in there it said that at one point he personally owned about 1% of all the wealth in America. And during a financial crisis the Fed approached him to commit himself to keep order. He said he would personally support the market and a crash was averted.

Now that's power.

Wonder if Bill Gates will do the same thing in 2005? In fact, would he have the clout?

did they ask buffet? he lost $25billion last year

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Thats always been my fear about Derivatives. Created by Rocket Scientists who are managed by people you wouldn't trust with matches who usually fall asleep in any discussion while successfully hearing the word profit.

Not a good combination in my experience.

Well they made programmes about these very thoughts only in the past few months. Eek was ahead of his/her time.

Respect. ;)

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  • 433 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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