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How are Hedge Funds holding up?

Written by A Forex View From Afar on Monday, March 10, 2008

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Since the credit crisis began, the smile of hedge funds had been wiped out, with banks having a big contribution.

Hedge funds, the symbol of an entire industry, should make money in every possible situation, or at least to minimize the losses. These days they are simply shutting down.

The current situation is not so bad. Yes, the S&P 500 and Dow Jones are falling, but not at a breathtaking pace, plus Bond prices go up, as with commodities like gold and oil, while in our beloved Forex market, the trend is clear: sell the dollar.

So there are plenty of opportunities to make money, or in the worst case to hedge your losses, but still, Hedge Fund are starting to get margin calls or closing doors. To put it simpler, its the leverage that makes it possible, not because of reckless trading, but because of banks increasing collateral for debt.

Banks have taken a $188 billion hit until now (with more to come), while liquidity in the market is drying and default insurance is rising. These conditions made banks require additional funds for collateral, limiting banks exposure to risk.
The average increase for AAA debt is between 10 and 20 points. This is huge, since we are talking about AAA rated debt, the Highest you can get.
Banks don't just increased collateral for real estate and consumer debt, but for Treasuries too. This is very strange, since Treasuries are considered to be the "safe haven", the holy grail of uncertainty. Raising collateral for Treasuries is the equivalent of saying the U.S. will default.

The credit crisis has clearly pushed the financial markets into making weird decisions which surely will have long term negative effects. Risk aversion won't come back in a weak or two, it will take time for banks to lick their wounds and recover their losses. I'm starting the feel that the bank's problems will go beyond Q2.

Bloomberg: Hedge Funds Reel From Margin Calls Even on Treasuries

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There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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