財經觀察 1524 --- THERE\'S NO MELTDOWN

THERE'S NO MELTDOWN

 

24 November 2008

 

Everyone's worried that hedge fund investors will pull their money out en masse, leading to another wave of stock sales that will send the market lower. That's not how it looks to one insider.

 

BEAR IN MIND two caveats as you peruse these comments. First, I run a hedge fund so I am hardly an unbiased observer. Second, nobody, and I mean nobody, really knows what hedge fund liquidity is or what redemptions are or will be. What follows are the enlightened--I hope--opinions of an aged participant about the unknown. I am, however, investing my money and others' on these opinions.

 

During the 40% bear market of 2000--2003, hedge funds and their fund of funds as a group posted positive returns each year. This exemplary performance spurred a huge boom, and the industry by the end of last year had more than 7,000 funds, managing an estimated $1.9 trillion worldwide. Big money and greed attracted less qualified, inexperienced, and trading-oriented participants.

 

In this year's killer bear market, hedge funds, with precious few exceptions, have suffered big losses, proving once again the old truism that there is no asset class too much money can't spoil. Now the worry is that a tsunami of redemptions from disillusioned investors will force a deluge of hedge fund selling that will depress markets further.

 

I don't see that happening. For one thing, the panic has abated, and since most funds have losses to make up before they can begin to earn their performance fee again, investors who redeem now are forgoing a free ride. (Of course, they still have to pay the fixed fee.)

 

Another reason is that so-called long-only managers (mutual funds, investment counselors, traditional portfolios) have done even worse this year. So where are the redeemers going to put their money? Most of the hedge fund money is in the big multistrategy funds run by the best and the brightest, and I suspect that institutional investors will be loath to abandon them. However, several thousand smaller hedge funds will go out of business, either because of poor performance or lack of scale.

 

There is no question that a lot of money is coming out of the hedge fund space. Let's look at the $1.9 trillion. Losses have probably reduced it by 25%, to $1.4 trillion. Based on what I see and hear, $350 billion to $420 billion will be withdrawn by the middle of next year. Probably about $150 billion has already gone. That means that there is about $250 billion to go (again, I am talking worldwide). That's not a huge amount, but what the bears are terribly worried about is that presumably this money is leveraged, and so to raise the cash, hedge funds will have to sell two to three times that much.

 

In fact, at least one huge multistrategy fund has been liquidating leveraged positions. But I don't think that's the start of a wave. First, the prime brokers for the industry report that the hedge fund industry's net long position is now around 20% of their equity, an all-time low. Hedge funds have heard the redemption footsteps: They have already sold down their long portfolios and tremendously reduced their gross book and leverage. It is a fact that hedge fund margin debt has been declining since July 2007, and prime brokers report massive hedge fund cash holdings.

 

In every bear market I have seen, the doomsayers concoct a statistical argument that the glory days for stocks are over, because a flood of selling by brutalized investors is inevitable, and the buyers have no money. This case always seems most compelling close to the end of the declines and is always marked by a wave of media pronouncements. Remember Business Week's "The Death of Equities" cover in 1980? Recent covers from Business Week and The Economist have had similarly dire alarms.

 

Investors are licking their wounds. The peak-to-trough decline in the Dow Jones industrial average was 42.3%, the second-worst since the Depression. The angle of descent has never been matched, and volatility as measured by the VIX index is at record levels. The Dow is 32% below its 200-day moving average, the widest spread since November 1937 The bottom of a bear market by definition has to be the point of maximum bearishness, and I think we're there. For the market to go up, the news doesn't have to be good. It just has to be less bad than what has already been discounted.

 

BARTON BIGGS is managing director of Traxis Partners, a global hedge fund.

 

 

Lessons from The Asian Crisis

The response of various regulators in Asia varied considerably. It ranged from a laissez faire approach that Thailand adopted to nationalization of pretty much the whole banking system in Indonesia.

 

In all the responses, what was common was (with the exception of Thailand) that the state removed bad loans from the system through an asset purchase. In contrast, Thailand adopted an approach similar to TARP by agreeing to inject capital by matching privately raised capital (Siam Commercial was the main user with a THB32.5bn capital raising in Feb 99, supplemented with a like amount from the THB300bn fund). This delayed a recovery in Thai banking in contrast to other crisis hit countries. It was not until when Thaksin was elected that various troubled asset buying AMCs were set up (BAM, PAM, SAM etc) that credit started to flow. The following is a summary of Asian responses:

 

n         Indonesia - nationalized the banking system and exchanged NPLs for high coupon bonds issued by IBRA.

n         Malaysia - set up twin agencies - Danharta to buy bad loans and Danamodal to inject capital

n         Korea - Kamco acquired bad loans in exchange for prefs issued by banks

n         China - 4 AMCs bought bad loans in exchange for state guaranteed bonds

n         S&L crisis - RTC bought bad loans

n         Thailand - In Sep 98 announced a capital injection fund of THB300bn. Only SCB utilized it while others such as KBank (Thaifarmers in those days) set up its own "good bank; bad bank" structure.

n         See the pattern above?

 

Unless bad loans are removed from the system, it becomes near impossible for banks to focus on lending again. It is not to suggest that loans be bought at book rather than market value - that is a decision on shareholder value impact - but unless loans are removed from the system, expecting banks to lend again is a fond hope.