Tuesday, February 17, 2009

Brokerages Tighten Hedge Fund Financing

Brokerage firms are reducing financing and other services to hundreds of hedge funds, in a move that could accelerate the shakeout among these heavy-hitting investors.

Under financial pressure, securities firms are dividing their hedge-fund clients into lists of those they consider best able to weather the financial turmoil and those they're less sure of. The result is that more funds may have to merge, find other financing at higher cost or close.

The squeeze, described by a range of brokerage-firm and hedge-fund officials, takes different forms. For instance, they say firms have reduced financing for the flagship fund run by John Meriwether, a founder of Long-Term Capital Management, the fund whose near-collapse caused a brief market crisis in 1998. The move has forced Mr. Meriwether's Relative Value Opportunity fund -- down 42% in 2008 -- to reduce its borrowing to finance trades, putting pressure on returns. Mr. Meriwether, whose firm is called JWM Partners LLC, declined to comment.

Banks also have pressed Kenneth Griffin's Citadel Investment Group, whose biggest funds lost 54% last year, to sell some securities and reduce its borrowing to finance trades. Goldman Sachs Group Inc. increased financing costs last year when a big trade went sour for another large fund, Glenview Capital Management. J.P. Morgan Chase & Co. has tightened financing terms for some funds.

Being on banks' less-favored lists doesn't necessarily mean a death knell for hedge funds -- private investment partnerships that cater to institutions and the rich and have wide discretion in their strategies. Plenty of such funds could continue, especially smaller ones that don't rely heavily on Wall Street. Funds also could get off the lists if their returns rebound or they get cash infusions from investors. But since many hedge funds make heavy use of borrowed money, or leverage, reduced financing can crimp performance.http://online.wsj.com/article/SB123483417670296081.html?mod=testMod

1 comment:

Hedge Fund Lawyer said...

This article is talking about some of the very largest hedge funds. Smaller hedge funds (generally those with fund assets below $100 million) should not see as drastic of a drop in their borrowing power, all things remaining equal. Many managers starting a hedge fund in the new year may have some trouble finding initial financing unless they have great banking connections.

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