LTCM and now TIGER??? Interesting article posted 8/7/99
MARKETS FEAR HEDGE FUND COLLAPSE MAY BE LOOMING
CONCERN IS growing in the financial markets
that a major hedge fund is in difficulty, prompting
fears of a repeat of last year's crisis when the
Federal Reserve in the US had to mount a $3.5bn
bail-out of Long- Term Capital Management
(LTCM) in order to stave off a global financial
collapse.
The market for swaps, complex interest-rate
derivatives which are widely used by hedge funds
and the proprietary trading desks of the big
investment banks to fund their high-risk trading
strategies is, say traders, showing the same signs
of distress that was seen after the Russian bond
default last August.
This has taken the form of a widening of credit
spreads - the interest rate differential - indicative
of concerns within the market of a major default.
Spreads on 10-year swaps have widened on both
sides of the Atlantic from the early 80s (0.8 per
cent) to 110 over the past few weeks. Over the
past few days the widening has accelerated.
The UK gilts swaps market is one of the most
liquid in the world and a favourite haunt of big
hedge fund players.
Tiger, the $12bn hedge fund run by New
York-based financier Julian Robertson, yesterday
dismissed as "rubbish" reports that Goldman
Sachs, and Chase had cut its credit lines. Sources
close to LTCM have been similarly dismissive of
reports that it too was again in difficulty, less than
a year after being rescued by a consortium of 13
banks including Barclays, Deutsche and Merrill
Lynch.
Other accounts have referred to a big US or
Swiss bank having taken a big hit.
Worries about big trading losses have been
exacerbated by a number of large trades in both
the equity and swaps market yesterday and on
Thursday, indicative of an unwinding of big
market positions. Goldman Sachs was reported
to have unwound a big swaption (combined swap
and option) position, and was also rumoured to
have lost pounds 200m on European options.
There was talk, too, that the Fed was holding
back on raising short- term interest rates to keep
one of the big securities houses afloat.
The problems in the swaps market appear to
have initially been caused by concern about the
pile-up of corporate issues ahead of the
fourth-quarter when demand is expected to dry
up because of Y2K fears. However, over the last
few days talk that a major institution is in difficulty
has come to the fore.
Some of the big investment banks yesterday
admitted privately to sustaining small losses over
the past few days but nothing that would result in
a material profits hit let alone a default.
Adrian Davis, swaps analyst at ABN-Amro, said
yesterday: "Over the past few months spreads
have been widening out because of concern at
oversupply in the bond market. However, in the
last three or four days they have really blown
because of concerns about the viability of a
financial institution."
Said another trader: "The markets are very
strained. They are very like they were last year. In
these kind of markets people will have lost
money."
Although hedge funds and Western banks lost up
to $40bn when the Russians refused to honour
their GKO bonds, the real problem that brought
LTCM to the brink of collapse was the widening
of credit spreads in the the swaps and
high-yielding bond markets which blew its
strategy of buying high-yielding bonds in
anticipation of yields falling to bits. |
