Hedge funds threatened in world turmoil

Date: Friday, August 17, 2007
Author: David Litterick in New York and Mark Kleinman in Hong Kong, Telegraph.co.uk

The US markets plummeted for the sixth consecutive day as traders became increasingly rattled that the continuing global turmoil may be about to claim a large hedge fund as its latest victim.

The Dow Jones Industrial Average fell as much as 343 points late in the afternoon but rallied strongly just before the close to end the day down 15.7 at 12845.8. The Nasdaq closed down 7.7 points and the S&P 500 closed up 4.55.

Traders had became increasingly rattled that the continuing global turmoil. They had fed off massive declines in Asia - where the Hang Seng lost more than 3pc, South Korea's Kospi slumped 6.9pc and Mumbai's Sensex dived 4.3pc - and sparked another day of selling in Europe.

The FTSE 100 lost 4.1pc, or 250 points, to crash back through the 6,000 level and hit 5,859, its lowest close since September last year. The index is now down nearly 6pc so far this year and 15pc below its all-time high. The FTSE 250 fared even worse, losing 427 points to close at 10,462.

"It's a selling panic," said Mark Mobius, who oversees £15bn of emerging market investments at Templeton Asset Management in Singapore of the selling in the Asia. "It's gotten out of hand with a lot of hedge funds and we're seeing a lot of negative news with very few positives."

Roger Groebli, head of Asia equity research at ABN Amro Private Banking, said the sell-off across the region was "overdone" but added it was difficult to predict when it would stop. "It is challenging to catch a falling knife," he said.

Investors were also spooked by fresh rumours as the jitters over the sub-prime lending crisis and credit crunch fails to abate.

Ratings agency Moody's said that as investors try to unload illiquid investments such as collateralized debt obligations, hedge funds that are unable to exit their positions could run into trouble.

Chris Mahoney, vice chairman of Moody's, said the result could be the "failure and disorderly liquidation of a hedge fund of sufficient size to disrupt markets, as Long Term Capital Management threatened to do."

He put the chance at around 50pc and said the risk would remain for around six months. "We've seen quite a bit of contagion over the past two weeks, and it doesn't seem to be abating," he added.

Officials around the world sought to reassure investors over the health of the market. The UK Treasury said in a statement: "There will always be periods of uncertainty in the markets but our openness and flexibility continue to position the UK to benefit from the opportunities of globalisation and absorb shocks."

Nevertheless, some observers said it was hard to imagine what could drag the global markets out of their slump.