WEST PALM BEACH, FL (www.hedgeco.net) – The Bank for International Settlements {BIS} said that hedge funds managed the credit market crisis well following the downgrading of Ford and General Motor�sbond rating which rattled some segments of the hedge fund industry. According to the Bank, hedge funds exposed to such problems managed the crises well because they learnt lessons from the Long TermCapital Management crisis of nearly 8 years ago.
The Bank went on to explain that hedge funds have reduced leverage and consequently improved their risk management and tolerance levels. Losses encountered by convertible bonds and other credit derivatives did not spread to other sectors of the markets, in contrast to the effect which the Russian default produced on Long Term Capital Management, about 8 years ago. The Bank made such disclosures in its recently released quarterly review.
The bank report also noted that hedge fund managers are not as leveraged as in the days of the LTCM in 1998. The report stated, “Hedge funds today appear to be significantly less leveraged than in 1998, as of early June, there was little evidence of any counterparties experiencing severe financing difficulties as a result of losses” resulting from the downgrading of Auto bond ratings. The bonds of GM and Ford constitute about 3 percent of the entire investment grade debt market.
The BIS further explained that hedge funds and other leveraged investors in the convertible derivative markets took some losses, due to the fact that they are more active in the credit derivative markets. The BIS said, �Leveraged investors, such as hedge funds and investment banks’ proprietary trading desks, tend to be more active in credit derivatives than in their cash counterpart, at times their activities can exacerbate price movements. May 2005 seems to have been one such time�, the report stated.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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