Hedge funds wither as banks call their bluff

Date: Monday, March 10, 2008
Author: Richard Wachman, Guardian.co.uk

Welcome to the next installment of the credit crunch. Remember how the investment banks recently wrote off $140bn in loans linked to the sub-prime mortgage debacle? Well you ain't seen nothing yet, if last week's margin calls on hedge funds are anything to go by.

For the uninitiated, margin calls are when banks demand extra collateral as security in a falling market. Hedge funds have borrowed billions to fund investments, which have plummeted in value in the past few weeks. Now banks want the hedgies to stump up hard cash.

Last week, margin calls triggered the implosion of London hedge fund Peloton Partners, while in the US, a fund owned by Carlyle group had its shares suspended after it failed to furnish lenders with sufficient collateral.

Again, banks will be forced to take a bath as they discover that some hedge funds are what Warren Buffett said they were two years ago: financial weapons of mass destruction.