Marketwatch -It’s nearly eight years since the Long-Term Capital Management hedge fund cratered. At that time, the Federal Reserve engineered an extraordinary bailout on the (highly debatable) theory that the financial markets would otherwise be fatally disrupted.<\/p>\n
What would happen if there was another LTCM today? <\/p>\n<\/div>\n
The Connecticut-based institutional service Bridgewater Daily Observations, which itself manages over $150 billion, has been asking this disturbing question and getting a fairly disturbing answer. <\/p>\n<\/div>\n
In recent issues, Bridgewater pointed out that money invested in hedge funds is now five times higher than in 1998, when the LTCM debacle occurred. <\/p>\n<\/div>\n
Bridgewater also tried to show through a sophisticated analysis that hedge funds do tend to march in lockstep. That means, paradoxically, that they are vulnerable to the same things: “tight credit, widening credit spreads, and falling equity markets.” <\/p>\n<\/div>\n
Bridgewater’s summary: “We estimate that an unfavorable environment, in degrees comparable to 1994, 1998, and 2000\/01 will cost …equally to about 2\/3 of the S&L crisis and twice the size of the Mexican default in 1994 – i.e. it is material, but not system threatening.” <\/p>\n<\/div>\n