Friday, September 22, 2006

Houses, Hedge Funds -- No Place to Hide From Risk

krasser vergleich, aber irgendwie auch zutreffend. mit dem unterschied das es mir um die institutionen und personen die bei den (auch k├╝nftig folgenden hedge fonds busts nicht ansatzweise leid tut.

ich kann da eine gewisse "schadenfreude" nicht verhehlen..... :-)

Houses, Hedge Funds -- No Place to Hide From Risk
http://www.bloomberg.com/apps/news?pid=20601039&sid=aaL4xeM02XCA&refer=home

By Chet Currier
Sept. 22 (Bloomberg) -- Which is the worse thing to own right now -- a heavily mortgaged house in a fast-cooling real estate market, or a hedge fund that just got burned in natural gas?

That's a rhetorical question, of course. The answer could be either one, since either might easily wind up costing you more than you can afford to lose.


Both involve leverage -- the use of borrowed money or some other enhancer from the realm of financial engineering to increase the potential bang for your buck.

As the hoariest of all the hoary adages on Wall Street states, leverage cuts both ways. Whatever tool you employ to heighten reward in an investment increases risk by the same amount.

It is sad to read of individuals and families who bought houses 12 or 18 months ago and now can't find a buyer when their circumstances require them to move. It's troubling to think how the economy as a whole may suffer along with them.

It is also unsettling to be reminded of how suddenly a supposedly sophisticated hedge fund -- a partnership of rich people who can afford to employ the smartest minds around -- may run off the rails.

Such was the news this week that Amaranth Advisors LLC of Greenwich, Connecticut, lost billions of dollars trading in the natural-gas markets. This followed the recent collapse of another hedge fund, the $400 million MotherRock LP, because of energy trades. http://immobilienblasen.blogspot.com/2006/09/was-sind-schon-5billionen-verlust.html

Pointing Fingers

When bad things like this happen, it's only natural to look for somebody to blame. In housing, one obvious candidate for castigation is the Federal Reserve, widely accused of having promoted a bubble in home prices.

According to this view, as the Fed cut interest rates to rock-bottom levels in the early years of this decade to stave off the threat of deflation, it over-stimulated demand for houses. The central bank's target rate for overnight bank loans was below 2 percent for almost three years, from December 2001 until November 2004.

Runaway increases in house prices set off a mania similar to the rush to buy technology stocks in the late 1990s. Just as the stock-market excesses led to a tech wreck in 2000-02, so hopped- up housing has now given way to an inevitable letdown with potentially painful consequences throughout the economy.

As for the hedge funds, they too are evoking ugly memories from the '90s. Eight years after a $4 billion debacle at the hedge fund Long-Term Capital Management LP, the risk of blow-ups persists.

Hard-Knock School

Every financial disaster has valuable lessons to offer. Much that is good in modern U.S. financial regulation came out of the aftermath of the stock market crash of 1929 -- including the Securities and Exchange Commission and the Investment Company Act of 1940, which laid out the framework for today's $9.4 trillion mutual-fund industry.

Individual investors big and small also learn from bitter experience: Risk is always to be respected. While it can be managed via measures such as diversification, those measures usually involve paying a cost in potential profits forgone.

And risk-management always has its limits. No amount of wisdom or carefully calculated regulation can ever tame it. Nor, when you think about, would that goal necessarily be desirable if it somehow could be attained. Without risk, a market loses its bearings.

Whatever part the Fed may have played in the upward spiral of house prices, it was hardly the only culprit. Financial innovation and progress also played a key role, by removing the threat of periodic credit crunches that used to plague the creaky old market for mortgages in this country.

Price to Pay

Once the supply of mortgage money was no longer so susceptible to interruption, it began to seem a lot safer to pay ``too much'' for a house. The price, however lofty, would probably keep on rising.

Trouble is, prices began to go so high that fewer and fewer new buyers could pay them. If the housing market must decline for a while now, hey, that's only fair to the next generation of people who want to live in houses too.

Blow-ups in hedge funds drive home the point that these funds really aren't suited for everybody, and never will be. They also remind us that there is nothing inherent in the setup of a hedge fund that assures everybody of always getting a market- beating return.

Risk looks like it will be wreaking havoc for a while longer in housing, in hedge funds, and who knows where else. But this too shall pass. Without the palpable presence of risk, we might be in far more serious trouble -- and not even know it.

jan-martin

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