Losses spark hedge fund redemption concerns

Let the run begin.... And when you read comments from the hedge funds managers like the following via the excellent Naked Capitalism they better should take steroids to run faster.... I also recommend to read Genius Fails Again from Mish

Das gibt einen schönen Run auf die Kohle......Und wenn man Kommentare wie diesen von einem Manager liest sollte das auch nicht weiter verwundern. Besten Dank geht an Naked Capitalism für dieses wahrhaft aufschlußreiche Zitat. Zudem gibt Genius Fails Again von Mish weiteren Aufschluß darüber wie spaßig die nächsten Monate noch werden können.

"Wednesday is the type of day people will remember in quant-land for a very long time," said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. "Events that models only predicted would happen once in 10,000 years happened every day for three days."

Read this twice! They should combine their models with models from the rating agencies....... :-)

Lest diesen Satz zur Not zweimal! Die sollten am besten Ihre Modelle mit denen der Ratingagenturen zusammenlegen.... :-)

This news isn´t helping either...Auch diese Neuigkeit dürfte nicht gerade hilfreich sein....
Basis Capital Tells Investors Loss May Exceed 80%
Desperation.....Verzweiflung....
Goldman Fund Cuts Fees to Woo Investors After Loss



Thanks to Minyanville !

SAN FRANCISCO (MarketWatch) -- Recent losses suffered by some hedge funds have raised concern that managers in the $1.5 trillion industry could get big redemption requests from investors this week.

Hedge funds usually lock up investor's money for three months or longer. There are also redemption-notice periods, giving managers time to raise cash to repay investors. Those range from roughly 15 to 90 days.

If investors want to get their money out of a fund by the end of the third quarter, a 45-day redemption notice period would mean that withdrawal requests need to be in by the middle of this week.

Some of the largest hedge fund firms in the world were hit by losses in early August, including Goldman Sachs , Renaissance Capital and AQR Capital Management. See full story.


If investors are rattled by such losses, they could ask for their money back this week. That, in turn, may be causing hedge funds to raise cash now to prepare for big withdrawals. (It's not clear whether Goldman, Renaissance or AQR have received redemption requests).

"This week is a major redemption window," said Lawrence Glazer, managing partner of Mayflower Advisors LLC, a Boston-based financial advisory firm. "So managers may be raising cash in anticipation of these redemption requests."

Sentinel Management Group Inc., a firm that manages cash for institutional investors including hedge funds, roiled markets on Tuesday after telling clients that it will halt redemptions to avoid selling securities at deep discounts.

Some of the hedge fund managers who are worried about possible redemption requests from their clients could be contacting Sentinel to ask for their cash back. See full story.

Some firms that allocate money to a range of outside hedge funds - so-called fund of hedge funds - may be forced to redeem because they are getting withdrawal requests from their own clients, Parker also noted.

"Money could disappear quickly - faster than it came in -- if you've had a bad drawdown this past month or two," he explained.

However, some of the biggest and most respected hedge fund firms have much longer lockups - of two or three years. See story on lockups.

Parker also noted that many hedge funds have 60-day redemption notice periods, so the window for third-quarter withdrawals may have passed for some investors.

A bigger concern is that investment banks are trying to shrink their balance sheets and could decide to lend less money to hedge funds, Parker said.

Most hedge funds rely on leverage, or borrowing, to magnify their returns. Some fixed-income hedge funds that don't have long-term financing in place could be forced to sell their assets quickly if their financing lines are pulled by investment banks, Parker explained.

"Liquidating a portfolio when there are no bids is devastating to the investors," she added

Another One Bites The Dust....Hedge Fund Firm Absolute Capital Suspends Withdrawals

After reading the management statements it is now wonder that investors run for the money...... But thats the downside of doing no due dilligence

Kein Mitleid für die Investoren. Wer so einem Management Gelder ohne weitere Überprüfung hinterherschmeißt muß mit dem Totalverlust rechnen

July 26 (Bloomberg) -- Absolute Capital Group Ltd., an Australian hedge fund that invests in collateralized debt obligations, suspended withdrawals from two of its funds after forecasting losses amid a rout in U.S. subprime mortgages.

The firm froze its Yield Strategies Fund and Yield Strategies Fund NZD, which together have about A$200 million ($177 million) under management,

Absolute Capital, which says it doesn't invest in the riskiest portion of CDOs, is suffering from the widening impact of delinquencies on U.S. home loans to people with poor credit. Basis Capital Fund Management Ltd., another Australian hedge fund battered in the North American market, has hired Blackstone Group LP to negotiate with bankers to help it limit losses.

Thanks to Minyanville

``Because of the contagion from subprime, all of the credit sectors are re-pricing,''

Australia's hedge fund industry has been rocked by losses at Basis Capital, which has said the value of its Yield Alpha Fund may plunge more than 50 percent if its assets are sold at distressed prices. Sydney-based Mariner Bridge Investments Ltd. on July 20 wrote down the value of its U.S. residential mortgage-backed securities.

Swelling Assets
The nation's 20 million people are the world's biggest investors per capita, making it the fourth-largest managed funds industry.

Australian hedge fund managers directly controlled A$41 billion in assets as of July last year, the most in Asia, according to AsiaHedge. Assets almost tripled in the two years to June 2006 as money from compulsory pension savings, tax breaks, a new state-owned investment fund and takeovers boosted fund inflows, according to government data.

Absolute Capital said it won't process any requests for withdrawals until Oct. 25, estimating it may take three months for enough buyers to return to the CDO market.

Entwistle said 50 percent of Absolute Capital's two funds is invested in the so-called ``mezzanine'' portions of CDOs, which are typically assigned the second-highest non-investment grade rating of BB by ratings companies.

>doesn´t they say just say ....

>haben die und nicht gerade das erzählt....

Absolute Capital, which says it doesn't invest in the riskiest portion of CDOs

`More Pain'
Basis Capital's investments included the unrated portions of CDOs, the first in line for losses when borrowers fall behind on mortgage payments.

> LOL!. See comment above.....Siehe Kommentar.....

Investors earlier this month were demanding an extra 10.5 percentage points in yield over benchmark rates to own some of the lower investment-grade rated parts of CDOs, up from about 3.1 percentage points in July 2006, according to data compiled by Morgan Stanley.

Sales of CDOs rose fivefold to $503 billion last year, compared with 2003. Investor appetite for the securities is now waning. Analysts at New York-based JPMorgan Chase & Co. this week said CDO sales slumped to $3.7 billion in the U.S. this month from $42 billion in June.

Ratings agencies have been criticized by investors for not acting quickly enough to the subprime mortgage crisis. Leah Rhodes, a Melbourne-based director of structured finance at Standard & Poor's, today said losses from U.S. subprime loans ``did exceed our expectation.''

> I don´t think that this statement will be enough to defend them in the upcoming investigation.....

> Glaube kaum das diese Art von Aussagen in den sicher folgenden Untersuchungen genügen wird.....

Bear to lend $3.2 bln to one of its hedge funds But bank doesn't lend money to other, more leveraged, fund

WOW! The $3.2 billion bail out was only for one (the less risky!) hedge fund.... Suddenly almost over night nobody wants to hold this ticking time bomb in his hands/books. But somebody has to..... This could be the story that finally brings risk premiums back to the market....At least for Bear Sterns :-)!

Donnerwetter! Die 3,2 mrd$ Kreditspritze für den in Schieflage geratenen Bear Stearns Hedge Fond betrifft nur den nicht ganz so riskant aufgestellten Fond. Es scheint fast so als wolle plötzlich über Nacht keiner mehr diese bereits seit Monaten tickenden Bomben in den Büchern haben. Warum diese Erkenntnis so lange gedauert hat ist mir schleierhaft. Ich denke diese Geschichte hat das Potential endlich die Risikobereitschaft auf ein normales Niveau zurückzufahren. Das sollte in jedem Fall für Bear Stearns gelten :-)!

SAN FRANCISCO (MarketWatch) -- Bear Stearns Cos. unveiled a rescue plan on Friday after a hedge fund it runs was hit hard by trading billions of dollars worth of mortgage derivatives this year.

But the bank didn't offer much help to another of its struggling hedge funds which borrowed more money to magnify its bets in the same market. Both funds control roughly $10 billion in mortgage-related assets.
Bear said on Friday that it has offered to lend up to $3.2 billion to the High-Grade Structured Credit Fund to ease the pressure of margin calls and pay off other creditors. The new loan will help the High-Grade fund reduce its leverage in an "orderly" way, the bank added.

The more leveraged High Grade Structured Credit Enhanced Leveraged Fund didn't get a loan, but Bear said its asset-management division will continue to work with creditors and counterparties to repay current outside lenders and free up cash. ....
Both funds, run by Bear mortgage veteran Ralph Cioffi, lost money in March and April when big mortgage bets went awry. The losses came after 14 consecutive quarters of gains, Bear Chief Financial Officer Sam Molinaro said during a conference call with analysts on Friday....

> That´s the beauty of a 10 or 20:1 leverage....... SCHADENFREUDE!

> Das ist doch das schöne am 10 bis 20 :1 gehebelten Einsatz...SCHADENFREUDE!

"When you have a situation like this, it puts a lot of pressure on asset values and spreads in the market," Bear's Molinaro said during the bank's conference call on Friday. "It appears to be relatively contained from our perspective. But we can only see what we're doing."

>It seems like there is no statement out there without "contained".....

> Jedesmal wenn Kommentare zu Problembereichen abgegeben werden ist selbstverständlich alles "contained" und damit nicht weiter schlimm......

The value of the mortgage-related assets held by the funds has dropped "significantly" during the past two weeks because the market was expecting the funds to be forced into selling assets to raise cash, Molinaro said.

"This will take several months to work out," he told analysts on the call. "Hopefully markets will stabilize relatively quickly once we eliminate the overhang of these securities potentially being sold into the market."

Loan 'secure'
Molinaro also said the loan Bear Stearns is extending to its High Grade hedge fund is "secure," noting that there's a high probability that it will be repaid.

"We are over-collateralized by a reasonable level," he added. That means there's more than a minimum amount of assets backing the loan. Borrowers in the debt and structured-finance markets often include more collateral than is required to get a better credit rating.

Still, Molinaro warned that further significant declines in the value of the collateral could cause a loss on the loan.

Enhanced fund
Molinaro was less forthcoming about plans for the Enhanced fund.

Both hedge funds invested in similar types of mortgage assets, including AAA and AA rated collateralized debt obligations, Molinaro said.

But the Enhanced fund had a layer of "mezzanine" assets, which provided the extra leverage, he explained. Mezzanine tranches of CDOs and mortgage-backed securities are lower-rated and riskier than some other parts of these structures. But they're not the riskiest parts.

There have been sales of assets from the Enhanced fund and there will be more in future, but Molinaro said Bear Stearns is "hoping to do this without forcing massive liquidations in the marketplace."

> Too late, the gates are now open.....

> Das dürfte ein frommer Wunsch sein. Die Tore sind geöffnet......

"We're working with all counterparties to effectuate as orderly a de-leveraging as we can with an eye to preserving as much capital as possible," he added.

Bear's Molinaro said on Friday that there's been a "dramatic widening (of spreads) in all of those pieces across the capital structure."

When spreads widen, that indicates investors have become more risk-averse and demand higher rates in return for holding riskier assets.

Magnitude
The hedge funds also ran into trouble because they couldn't meet investor redemption requests and margin calls, which came in much quicker than expected, Molinaro explained.

"When you have difficulty raising liquidity to meet margins calls, that causes more margin calls," he said. "The inability to satisfy margin calls from clients triggered further declines in values."
"These two funds invested in an asset class that went through a period of severe distress," he concluded. "Controls on the asset management side did not envision market dislocation of this magnitude and this kind of liquidity drain

> Remember this kind of story when somebody wants to argue that financials and investmentbanks should have higher multiples.........

> Diese Geschichte sollte man sich immer in Erinnerung rufen wenn gefordert wird das Finanzwerte und besonders Investmentbanken höhere KGV´s zuständen.......

Bear Stearns Saga Part IV " How To Mask The Derivative Value"

This story that started already interesting ( see links) has the potential for something really big. to me it is obvious that nobody from Wall Street wants to show how far the real market value of the derivatives have already crashed. it will be interesting to see how long this fact can be hidden......one thing is for sure... the liquidity in this segment will take a significant hit....

part 1 http://tinyurl.com/23s9fp ,
part 2 http://tinyurl.com/2sdv2u,
part 3 http://tinyurl.com/2p75le

Das ganze fing ja schon recht interessant an (s.links). Nun denke ich das die Entwicklung der letzten Tage und vor allem das Verhalten der großen Spieler an der Wall Street gezeigt hat das hier wirklich dramatische Auswirkungen drohen. Dürfte für Leser dieses Blogs nicht ganz überraschend kommen :-). Es scheint ziemlich offensichtlich das hier mit aller Macht versucht wird den Marktwert der Derivate zu verschleiern. Habe Zweifel ob das noch lange gelingt. eines scheint aber jetzt schon klar...die Liquidität in diesem Segment wird einen Schlag versetzt bekommen.....aber wie ich den Markt einschätze "die Karavane zieht weiter"......

The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. Bankers traded telephone calls, frenetically negotiating the fate of two hedge funds.

All wanted to avoid a fire sale in the troubled mortgage-securities market, but at the same time, not get stuck with an exploding liability that could result in steep losses. The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable.

As the morning unfolded, lenders to two hedge funds at a unit of Bear Stearns, the investment bank, tried to ascertain what they could expect if they auctioned off mortgage securities with a face value of up to $2 billion. The solicitations were hastily withdrawn when investors reacted with little enthusiasm. But by the end of the day, some of the less-risky securities did change hands.
At the same time, several lenders, including JP Morgan Chase, Goldman Sachs and Bank of America, reached deals with Bear Stearns that forestalled a need to sell securities in the open market. It appeared that some lenders pulled back over concerns about the effect that a large liquidation would have on bond prices and investor confidence. While the securities involved represent a fraction of the market, a liquidation could have forced a bigger sell-off while setting a lower price.

One lender, Merrill Lynch & Company, moved ahead with plans to auction $850 million in collateral it had seized from the Bear funds, according to people briefed on the matter. And Deutsche Bank was said to be shopping $600 million in assets. ......

The deal that JP Morgan Chase reached with Bear Stearns Asset Management allowed it to sell $400 million collateral back to the hedge funds for cash, according to people briefed on the matter. It was not clear what price the two banks agreed to.

Goldman Sachs and Bank of America reached similar deals, though details remained unclear. Also unclear is what price the assets will eventually fetch for the Bear funds and what types of losses investors, who have been unable to redeem their investments since May, will face.

The securities causing the greatest concern within the Bear Stearns funds are known as collateralized debt obligations, or C.D.O.’s. Run by portfolio managers, these complex instrument are akin to mutual funds in that they buy stakes in a variety of bonds backed by mortgages.

They often invest in the riskiest portion of the bonds, usually with a hundreds of millions or billions in borrowed money. Some simply buy stakes in other C.D.O.’s. About $316 billion in C.D.O.’s specializing in mortgages were issued last year, up from $178 billion in 2005. ...

>no wonder they dont want to price them to market.....
>hier kann man erahnen warum einer die zum Marktpreis bilanzieren will.....

He said it would take time — perhaps several days — for potential buyers to drill down into some of the more complex securities in order to value them before any bids could be prepared. From 33 to 45 percent of the $2 billion in C.D.O.’s on offer by the funds early yesterday were investments in other C.D.O.’s,

One worry about the possible unwinding of the Bear funds is that it will cascade into larger liquidations by other investors who hold similar securities at far higher prices. Accounting rules require investment banks to mark the value of the investments to the price of similar assets trading in the market. Many mortgage-related securities, and C.D.O.’s in particular, do not trade frequently, making them hard to value.

“Do you want to be the first one out and perhaps cause the lows to be hit in the market, or do you want to wait and see how this all plays out?”

In fact, rather than aggressively selling the assets it has seized, Merrill is quietly showing it to a small group of potential buyers, according to a person briefed on the process.

Such an approach helps to keep the pricing of the securities under wraps, allowing Wall Street firms to avoid marking down their own stakes. Keeping the sales price quiet also means that the firms may not have to add collateral immediately to shore up their portfolios.

At the end of the day, Merrill sold only a small portion of the $850 million in assets it had seized from the Bear funds as collateral. Traders said what did sell was the less risky, well-collateralized securities and that those sold near or at par in many cases. It is unclear whether Merrill intends to hold onto the remaining securities or whether it will try to sell them again down the road.

Yet another emerging worry is that the big investment banks that until now have generously lent billions of dollars on good terms to traders and portfolio managers are pulling back or demanding stricter terms.

One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road.

“We have heard that lenders have already reduced the amount that they are willing to lend against C.D.O.’s,” said Timothy Rowe, a portfolio manager at Smith Breeden Associates.

Still, analysts note that credit remains easy by historical standards and the market seems to be weathering the current storm well.

“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”

Mortgages Give Wall St. New Worries / Margin Call For Bear Stearns´ Hedge Fund

the Bear Stearns saga continues.......nice to see that the leverage was only 10:1.......with more and more Asset Backed Financing also in the corporate financing we will see more of this down the road.....

Die Bear Stearns Saga geht in eine neue Runde.....nett zu sehen das der Hebel nur bei 10:1 lag.....da das Vehikel der ABS Finanzierung vermehrt an Fahrt gewinnt dürften wir in den nächsten Jahren noch genügend verglecihbares erleben.

After the first cracks in the subprime mortgage business appeared late last year, several large lenders were forced into bankruptcy

Now, the stress is sending tremors down Wall Street, as investment funds that bought a stake in those loans are starting to wobble.
Industry officials say they expect this second act to be longer and slower, unwinding over the next 12 to 18 months. The fallout could further constrict consumers with weak, or subprime, credit while helping to prolong the housing downturn.

On Wall Street, the impact could be far more significant: It could force banks, hedge funds and pension funds to acknowledge substantial losses, which had been tucked away in complex investment vehicles that are hard to evaluate. In turn, that could limit the money available for mortgage lending.
Yesterday, two hedge funds operated by a division of Bear Stearns, an investment bank that is a dominant player in mortgage bonds, fought for their survival as three lenders — Merrill Lynch, Citigroup and JPMorgan Chase — asked Bear Stearns to put up more capital.

The funds appeared to have won a reprieve after executives at Bear Stearns Asset Management told creditors that they had lined up $500 million in new capital from a consortium led by Citigroup and Barclays, the British bank, according to a person who had been briefed but was not authorized to speak publicly. Last week, the fund sold about $3.6 billion in high-grade securities backed by subprime mortgages.
The leveraged fund, which had raised $600 million in investments when it was started 10 months ago, leveraged itself, or borrowed, about $6 billion from numerous Wall Street banks and brokerage houses. When losses began mounting this spring, some investors stepped forward to redeem their money. In May, the fund stopped allowing redemptions......

The riskiest portions of mortgage bonds — which also hold the promise of higher returns — are held by a small group of investors. The biggest holders of that risk are investment funds known as collateralized debt obligations, or C.D.O.’s.

The holdings of these funds, which are once or twice removed from the underlying loans, are often hard to value because it is often unclear what portion of a bond they may own.....

Liquidity Risk & Effective Leverage / Mish

this is a must read from mish! make sure you click on the headline to read the entire report!!!!

pflichtlektüre von mish! bitte zwingend auf die überschrift klicken um den vollständigen report zu lesen!!!!

Forced Unwind Example
Assuming a hedge fund leveraged 4.0x (20% margin) were operating near or at maximum permissible leverage, the fund could be forced to sell as much as 25% of its assets in the event of an initial 5% price decline in the value of its assets.

Any collective, downward pressure on prices in the market arising from the hedge fund unwinding or an increase in margin requirements from the prime brokers would magnify the total amount of assets the fund is forced to sell. For example, an increase in the prime broker’s margin from 20% to 25% on average would require a fund to deleverage as much as 40% to meet its margin calls and restore leverage to within acceptable limits.