Anbody been watching the yen shenanigans lately?: "Once Again, Wall Street Worries About Hedge Funds
By GRETCHEN MORGENSON
Investors stung by falling bond prices and a strengthening Japanese
yen fled the Treasury market Friday, driving the 30-year bond yield
up to 6.16 percent, its highest level since November 1997.
The violent move, from 6.06 percent the previous day, was fed in part by
Wall Street fears that some large investment portfolios known as hedge
funds had encountered a fresh set of problems.
The day began rather calmly, with bond investors taking in stride the
increase of 1 percent in retail sales in May and the rise of 0.2 percent in
producer prices reported by the government. Then, around midday, talk
swirled about liquidations by hedge funds, which are open to wealthy
individuals and institutions. This brought even more sellers to the market.
Many of the sellers appeared to be unwinding a type of trade that has
been extremely popular among speculative investors in recent months,
known as the yen-carry trade.
An investor making such a bet borrows funds in Japan at prevailing
interest rates there, which are far lower than those in the United States,
and then uses the money to buy bonds in the United States. The
difference between what investors pay in borrowing costs and what they
receive on their investments has been alluringly high.
Or it was until Wednesday, when the yen began rallying strongly against
the dollar. Then came the news on Thursday that the Japanese economy
grew 1.9 percent in the first quarter of 1999, the nation's first growth
reading in six quarters. The dollar fell 2.5 percent against the yen in four
days of trading.
At the same time, U.S. bond prices were falling, and yields rising, on
fears that the Federal Reserve Board would raise interest rates at its June
30 meeting. So any investor in a yen-carry trade was losing on both sides
of the transaction: the stronger yen meant less for investors repatriating
their funds into dollars and falling bond prices created losses as well.
Because the yen-carry trade has been so popular among speculative
investors, such as those managing hedge funds for wealthy clients, the
rising yen and declining bond raised the specter of a financial market
dislocation like that caused last fall by the near-demise of Long-Term
Capital Management, a fund run by John Meriwether, a former Salomon
trader.
Contributing to hedge-fund fears is the fact that some of the best-known
portfolios have had a poor year, with some investors abandoning ship.
Through June 3, Tiger Management, a hedge fund with $13 billion run by
Julian Robertson, had lost 7.36 percent. Quantum Fund, the flagship fund
overseen by George Soros, was down 14.8 percent as of June 4.
A spokesman for Tiger Management said Friday that the fund had plenty
of ready cash and could cover its investor redemptions four times over.
The fund allows investors to exit only twice a year, and redemption
requests for the latest period were due by May 31. People on Wall
Street said that Tiger had experienced redemptions of about $1 billion.
In addition to performance problems of its own, the Quantum Fund of
Soros has recently experienced management turmoil. Three high-level
managers left last month, and Soros said at a news conference Thursday
that he expected to hire new managers shortly to improve the fund's
returns.
A person close to the firm said that it was also interviewing candidates to
fill the new post of chief executive. The chief would run the operation and
report to Soros.
People in the hedge-fund community may also have been unnerved by
the news that one of the biggest and oldest investors in the Soros fund
was liquidating some holdings.
Reuters reported that Haussman Holdings NV, which manages $3.5
billion for investors, had reduced its Quantum Fund investment to 8
percent of Haussman assets, from 12 percent at the end of 1998.
Hedge-fund watchers say that the Haussman action is significant because
the firm was one of Soros' earliest investors.
With memories of the rescue of Long-Term Capital still fresh, skittishness
about hedge funds is to be expected, particularly among the banks and
brokerage firms that lend to them.
A senior bank executive with knowledge of Quantum Fund's portfolio
said Friday that lenders had very recently looked at the fund's positions.
The lenders came away untroubled, this person said. Calls to the Soros
Fund spokesman for comment were not returned." |
