Cash is new hedge fund king

Date: Friday, October 3, 2008

Hedge funds are carrying record levels of cash, underscoring how recent volatility has made it more difficult for funds to exploit attractive investment opportunities.

In addition, the high cost of borrowing has reached levels that are making it untenable for some hedge funds to stay in business, according to several hedge fund market sources.

The head of prime brokerage at one bank estimates that half its hedge fund clients are 50 per cent in cash while so-called fund of fund managers say the hedge funds they invest in hold at least 30 per cent cash.

More scarce and expensive funding is having an especially dramatic impact on credit hedge funds and so-called quant funds that use computer models to identify discrepancies in share prices and rely on massive amounts of leverage to produce profits as these discrepancies disappear.

"Hedge fund managers compensated for lower and lower spreads by adding more and more leverage," says Chris Suan, a veteran investor. "That paradigm is no longer possible."