Jitters are growing in financial markets about the potential for failure of hedge funds, largely secretive and unregulated pools of capital, seven years after a spectacular collapse of one such fund.
A number of reports and market rumors circulated in recent days about potential problems with hedge funds, although there have been no confirmed instances of difficulties at any of the funds.
But because hedge funds operate largely in secret, with little or no government oversight, some analysts have been concerned about the possibility of a failure and a subsequent ripple effect on banks and financial markets.
"In the last five years you've had more and more hedge funds managing more and more assets with more and more borrowed money," said AG Edwards analyst Scott Wren.
"When you've borrowed a lot and the market goes against you, you increase your chances of major losses."
"One of the first things you learn about financial markets is that if there's smoke, there's fire," said Robert Brusca, chief economist at FAO Economics, who added that he had no knowledge of any specific hedge fund problems.
Hedge funds, generally operating with money from wealthy investors, can try to beat the overall market by placing risky bets, "short sales" that seek to capitalize on falling prices, and by borrowing money, which can magnify both gains and losses. They may invest in stocks, bonds, commodities or "derivatives" that seek to mimic the performance of another security.
Reports said some hedge fund managers may have been taken by surprise by the abrupt movements in some markets, including the downgrading of credit ratings of Ford and General Motors bonds to "junk" status, and an offer for a big stake in GM's equity by billionaire Kirk Kerkorian.
David DeRosa, president of DeRosa Research, which advises hedge funds and other investment managers, said he was unaware of any specific hedge fund difficulties.
"There are a lot of rumors around. I have no way of knowing if they're true," he said.
Stoking fears is the weak performance of hedge funds this year. Overall, hedge funds lost 1.8 percent in the first four months of the year, according to Hennessee's Hedge Fund Index, which tracks the performance of about 900 managers.
But hedge funds that trade convertible bonds lost 3.5 percent last month on average, leaving them down 6.3 percent so far this year, according to Hennessee.
DeRosa said: "It doesn't matter if the hedge funds' performance is good or bad, but if a hedge fund is forced into liquidation, it would imply a lot of buying and selling of securities," and the potential for destabilization.
The ripple effect of a hedge fund collapse could affect banks that lend money to the funds, and other securities if a hedge fund is forced to sell in a liquidity crisis.
The fear on financial markets is a repeat of the situation with US hedge fund Long Term Capital Management (LTCM) in 1998, which destabilized global financial markets already in turmoil over financial crises in Asia and Russia.
EXPRESSING GRATITUDE: Without its Taiwanese partners which are ‘working around the clock,’ Nvidia could not meet AI demand, CEO Jensen Huang said Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) and US-based artificial intelligence (AI) chip designer Nvidia Corp have partnered with each other on silicon photonics development, Nvidia founder and CEO Jensen Huang (黃仁勳) said. Speaking with reporters after he met with TSMC chairman C.C. Wei (魏哲家) in Taipei on Friday, Huang said his company was working with the world’s largest contract chipmaker on silicon photonics, but admitted it was unlikely for the cooperation to yield results any time soon, and both sides would need several years to achieve concrete outcomes. To have a stake in the silicon photonics supply chain, TSMC and
‘DETERRENT’: US national security adviser-designate Mike Waltz said that he wants to speed up deliveries of weapons purchased by Taiwan to deter threats from China US president-elect Donald Trump’s nominee for US secretary of defense, Pete Hegseth, affirmed his commitment to peace in the Taiwan Strait during his confirmation hearing in Washington on Tuesday. Hegseth called China “the most comprehensive and serious challenge to US national security” and said that he would aim to limit Beijing’s expansion in the Indo-Pacific region, Voice of America reported. He would also adhere to long-standing policies to prevent miscalculations, Hegseth added. The US Senate Armed Services Committee hearing was the first for a nominee of Trump’s incoming Cabinet, and questions mostly focused on whether he was fit for the
IDENTITY: Compared with other platforms, TikTok’s algorithm pushes a ‘disproportionately high ratio’ of pro-China content, a study has found Young Taiwanese are increasingly consuming Chinese content on TikTok, which is changing their views on identity and making them less resistant toward China, researchers and politicians were cited as saying by foreign media. Asked to suggest the best survival strategy for a small country facing a powerful neighbor, students at National Chia-Yi Girls’ Senior High School said “Taiwan must do everything to avoid provoking China into attacking it,” the Financial Times wrote on Friday. Young Taiwanese between the ages of 20 and 24 in the past were the group who most strongly espoused a Taiwanese identity, but that is no longer
A magnitude 6.4 earthquake and several aftershocks battered southern Taiwan early this morning, causing houses and roads to collapse and leaving dozens injured and 50 people isolated in their village. A total of 26 people were reported injured and sent to hospitals due to the earthquake as of late this morning, according to the latest Ministry of Health and Welfare figures. In Sising Village (西興) of Chiayi County's Dapu Township (大埔), the location of the quake's epicenter, severe damage was seen and roads entering the village were blocked, isolating about 50 villagers. Another eight people who were originally trapped inside buildings in Tainan
RSS