財經觀察 1412 --- Hedge funds face collateral pressure

Hedge funds face collateral pressure

By Chris Hughes and Kate Burgess

Published: October 24 2008

The survival of a raft of hedge funds is being threatened by fresh pressure to stump up more collateral for trades made in a range of illiquid assets.

So-called prime brokers, who provide a range of services to hedge funds, are imposing tougher conditions on their clients and charging more for financing following the collapse of Lehman Brothers in mid-September, raising fears that more funds face collapse.

The more conservative terms mean that a hedge fund would have to put up additional collateral against financing if markets fall further, or sell down its holdings.

The problem for many hedge funds is that they have already sold down their more liquid investments and are grappling with a wave of redemptions from their own investors. Further collateral requests or higher financing costs may push many of them over the edge.

One fund manager said: “Funding is being withdrawn by prime brokers and funding rates have risen sharply in the past week or two. A tough environment is just getting tougher.”

Industry managers are concerned that renewed market turmoil, leading to weaker performance and client redemptions, could lead to a vicious circle of selling by hedge funds.

One prime broker said the situation was “on a knife edge”. “Everyone needs to keep their nerve,” he said. He added that prime brokers were particularly targeting funds that specialised in emerging markets.

Citadel Investment Group held a conference call on Friday to address concerns that its hedge funds would be forced into liquidation.

The firm said that redemptions were “modest’’ and it had $8bn (£5bn) in available credit to support trading. Citadel added that it was “significantly diversified”, with 30 per cent of its assets in cash and US treasuries.

Hedge funds have been selling assets over the past year to reduce their market exposure, but many have first offloaded the most liquid, or easy to sell, holdings. This has left them with a higher concentration of illiquid holdings.

Prime broking sources said that where higher requirements were being imposed, this reflected existing policies for times of increased market volatility, or when funds’ assets became less liquid.

“The policies are consistent, the volatility of the market and liquidity of certain portfolios is not,” said Roy Martins, head of international prime services at Credit Suisse.

One prime broker said margin requirements had risen across the board, although some convertible bond funds had been asked to put up more margin than others, and given less time to do it in.

Regards,