Have hedge funds played out?

Of course, they played a bad game! Such a loud statement with a no less loud title smacks of yellowness, but the facts speak for themselves. Nobody doubts that hedge funds play a huge role in the modern financial system of the world. But few of the ordinary speculators raised on the lavas of domestic DCs, could imagine that it was hedge funds whose activities are aimed at reducing the risks that would cause financial instability. Therefore, you need to start from the beginning.

I was not mistaken. You need to search for "the beginning." A normal description of the structure and mechanism of activity of hedge funds can be found at this link . For a general understanding, you can get by with a brief description. Hedgefund is a type of business consisting of a privately owned joint business activity, which has a different organizational and legal structure in different countries, but performs one function - risk management.

In other words, these funds were created as a distribution pocket, from which investor’s funds (here “limited partner”, USA) were invested by asset managers (here “common partner”, USA) into various financial instruments in order to “dispel” the risk and increase profitability. Further, we will not go into the details of the investment business. And just analyze the dynamics of hedge-fund assets. For clarity, I’ll give you a graph made by Expert magazine, on which there is an obvious investment bubble, the existence of which cannot occur separately from the price bubble. Most large hedge funds invested in mortgage bonds of US construction companies. The growth of rates, as well as the gap in the price bubble in the housing market, sales (data here and here ), which still show multi-year lows, were the main reasons for the depreciation of these bonds ( CDO ). A significant role was played by rating agencies, which often set undeservedly high ratings for such bonds. (Remember, after all, the hype about the investigations into the activities of these agencies?) At this we can say “the ice has broken.
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To sum up, so far we can talk about such serious collapses: two Bear Stearns investment funds, trying to restore their reputation ; German investment bank IKB ; Dutch NIBC Holding ; Australian Macquarie Bank ; French BNP Paribas indirectly confirmed that he had problems with this.

But another major European bank, UBS AG, confirmed its problems with the subprime mortgage and, as a result, with the crisis in the credit market, publishing yesterday (October 1) a report on profit for the 3rd quarter. According to this document, the losses are within 800 million francs, whereas last year the bank earned 2.2 billion francs for the same period.

In order to understand how the markets reacted to all of this, you should not particularly bother. You can look at the chart pound / yen and everything will become clear. Why this particular pair? Because for this pair we carried out carry trade operations in large volumes, and we know that the activation of such transactions occurs in conditions of financial, political, and economic stability in the markets. When the crisis broke out, all high-yielding assets (not only bonds, but also gold, some currencies, and later, oil) began to fall in price. Hence the next interesting point: what is the carry trades, and how far did they run away from the activity of hedges? A very interesting theory is advanced by Stephen Yen, from Morgan Stanley . The topic is interesting, translated from here . The main idea of ​​the article is a comparison of carry and currency hedging volumes. This has little to do with what I describe in this article, but it’s still connected: most large export-import transactions are hedged, so we should not neglect the volumes of these operations, even if we know that the development of derivatives has given a tremendous amount to speculative operations.

The collapse of hedge funds, naturally, will not in itself be reflected in my trade. For example. But how the market reacts will be the main engine of trade. I noticed for myself in the last month that the focus has definitely changed. Approximately 2 weeks before September 18, when the FOMC raised the rate, the market focused its attention on the decision. After the meeting, the focus of the market shifted to the data that may affect further changes in the rate. But the problems of the substandard sector, and in particular the problems of hedge funds, have not gone away. Maybe they are in the background, but they are. What will happen next - we'll see.