Hedge Funds Are Profits Of Doom

Date: Thursday, August 23, 2007
Author: Hedge Fund Daily

Lest anyone believe that the subprime mortgage morass has been all gloom and doom for hedge funds, The Hennessee Group notes that there may be more gainers than the well-publicized losers from the situation. Hennessee doesn’t quantify its assertion with any figures, but there is evidence to the winning ways by the sporadic reports of those hedge funds that have gained big. Given the media’s penchant for negative news, it is likely there are more positive results than is generally thought. And it should come as no surprise, as Hennessee calls the market of the moment “the best short sale theme since 2002.” Hennessee explains, “While some have focused on shorting mortgage lenders and buying credit default swaps on specific mortgage backed bonds, others have elected to purchase CDS indices of these securities (the ABX series) with most focusing on those securities issued in 2006 under more relaxed lending standards. The losers, on the other hand, are hedge funds that “leveraged long bets on bonds backed by sub-prime mortgages” and “experienced significant losses in the first half of this year.”

These funds ran into trouble, says Hennessee, when they leveraged investor capital between 10 and 20 times, and when the value of the underlying bonds fell, they faced margin calls from lenders, which forced selling of assets, and this exacerbated their losses even more. On the other hand, many a hedge fund “were expecting such an event and were able to profit from the decline.”