Derivatives Event Fallout
On 04/28/05 in High Yield Bond Market Timebomb we mused:
"There are rules which mandate that pension funds and insurance companies can only hold institutional grade debt.
As a result, when GM is downgraded, the market could be awash in GM debt as the institutions are required to divest, if they have not already."
On 05/10/05 in Yo' Junk Bond My Ride we mused on GM & Ford downgrades that could rock the financial world.
"Rumor has it that some funds may be struggling to meet margin calls. The complex trades made by many hedge funds mean that any troubles, risk drawing in the counter parties, particularly banks, with which they conducted the trades.
Most arbitrage bets are positioned for a widening or divergence of GM and GMAC...if Kerkorian is successful, GM is getting parted out.
Why? Kerkorian will sell the only thing GM and GMAC are good for, GMAC's non core assets. Such as the mortgage business, raising around $28 Billion, then GM will draw the finance unit in closer.
Therefore, we believe that GM and GMAC spreads would converge, rather than diverge.
What will the hedgsters, insurer's and banks involved do then? Can you say major trouble in the financial markets?"
In 06/10/05 Market Soapbox we commented on a rumour which we overheard.
A predicted early July meltdown of several hedge funds due to overexposure in CDO's and MBS may send severe ripples through the markets.
Be on the lookout for several large up days which will achieve a new peak, then its all downhill from there.
Looking back in retrospect, GM & Ford were downgraded, Kerkorian was sucessful in parting out GMAC and several major hedge funds melted down over this summer, $500 Million Bayou Group being the headline grabber.
The well-known Marin Capital hedge fund closed doors after big losses in convertible arbitrage and credit arbitrage; and Aman Capital also closed shop at the end of the mid-year. GLG’s Neutral Group, which has credit derivative investments similar to that of Marin Capital, lost $2.5 billion or 17.2% in the first half of the year. Cheyne Capital’s hedge fund lost 4.8% in May alone. The huge hedge fund Bailey Coates Cromwell Fund, after being named Hedge Fund of the Year for 2004, announced in early June that it would close down.
Should we be concerned?
About 20% of U.S. corporate and public pension plans were using hedge funds in 2002, up from 15% in 2001, according to a study that year by the Securities and Exchange Commission. Investment in Pension funds increased their investment in hedge funds by more than 450% to $72 billion from $13 billion in 1997, the SEC said.
Today over 8000 hedge funds control $1 Trillion with a notional value well above $15 Trillion, which is equivalent to our annual domestic GDP. With the markets recent schizophrenic behaviour one has to wonder if we are now witnessing the effects of the rumoured July meltdown. If the shoe fits...
Mish in his missive "Are we headed for a credit derivatives event?" gives some excellent coverage of the unwinding and potential dangers that have spawned from the finanicials markets reckless use of leveraged instruments. A must read.
"There are rules which mandate that pension funds and insurance companies can only hold institutional grade debt.
As a result, when GM is downgraded, the market could be awash in GM debt as the institutions are required to divest, if they have not already."
On 05/10/05 in Yo' Junk Bond My Ride we mused on GM & Ford downgrades that could rock the financial world.
"Rumor has it that some funds may be struggling to meet margin calls. The complex trades made by many hedge funds mean that any troubles, risk drawing in the counter parties, particularly banks, with which they conducted the trades.
Most arbitrage bets are positioned for a widening or divergence of GM and GMAC...if Kerkorian is successful, GM is getting parted out.
Why? Kerkorian will sell the only thing GM and GMAC are good for, GMAC's non core assets. Such as the mortgage business, raising around $28 Billion, then GM will draw the finance unit in closer.
Therefore, we believe that GM and GMAC spreads would converge, rather than diverge.
What will the hedgsters, insurer's and banks involved do then? Can you say major trouble in the financial markets?"
In 06/10/05 Market Soapbox we commented on a rumour which we overheard.
A predicted early July meltdown of several hedge funds due to overexposure in CDO's and MBS may send severe ripples through the markets.
Be on the lookout for several large up days which will achieve a new peak, then its all downhill from there.
Looking back in retrospect, GM & Ford were downgraded, Kerkorian was sucessful in parting out GMAC and several major hedge funds melted down over this summer, $500 Million Bayou Group being the headline grabber.
The well-known Marin Capital hedge fund closed doors after big losses in convertible arbitrage and credit arbitrage; and Aman Capital also closed shop at the end of the mid-year. GLG’s Neutral Group, which has credit derivative investments similar to that of Marin Capital, lost $2.5 billion or 17.2% in the first half of the year. Cheyne Capital’s hedge fund lost 4.8% in May alone. The huge hedge fund Bailey Coates Cromwell Fund, after being named Hedge Fund of the Year for 2004, announced in early June that it would close down.
Should we be concerned?
About 20% of U.S. corporate and public pension plans were using hedge funds in 2002, up from 15% in 2001, according to a study that year by the Securities and Exchange Commission. Investment in Pension funds increased their investment in hedge funds by more than 450% to $72 billion from $13 billion in 1997, the SEC said.
Today over 8000 hedge funds control $1 Trillion with a notional value well above $15 Trillion, which is equivalent to our annual domestic GDP. With the markets recent schizophrenic behaviour one has to wonder if we are now witnessing the effects of the rumoured July meltdown. If the shoe fits...
Mish in his missive "Are we headed for a credit derivatives event?" gives some excellent coverage of the unwinding and potential dangers that have spawned from the finanicials markets reckless use of leveraged instruments. A must read.
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