A word about hedge funds.....
Oftentimes, hedge funds offer redemptions only once per year, at the end of the year, and must be warned of the redemption before the 31 November.
Apparently LTCM only offers the possibility to exit 25% of your money per year over a four year period. The massive losses sustained in August and September (due to many things, most notably the emerging market mess, stock market losses, and simple bond and swap hedging activity against the bund future) have lost them all a tidy sum. Not to mention their European convergence trades in the bond market.
LTCM is not alone, most hedge funds have been slammed recently. But there are also the major banks, the "privileged" trading partners of the hedge funds, who replicate the same positions in the market. As noted in the WSJ today, many other so-called hedge funds are seeing losses on a similar magnitude to LTCM.
These hedge funds - the usual suspects - will undergo HUGE redemptions at the end of the year. If you were invested in one, would you support 50% + losses?
Many hedge funds are supposed to be fairly "riskless" arbitrage investors, like LTCM. No one, of course can say for sure, because
they remain completely secretive in their activities (unregulated by the SEC, of course). The problem is that volatility is chopping the true arbitrage shops to pieces. Those that call themselves arbitrage
hedge funds are taking directional positions anyway, but as an investor, you would never know this. Everest Capital? Finished. Tiger
Management? On the Ropes. Guess the rumors about Lehman Brothers' bankruptcy last week might have been true after all.
Sic Transit Gloria Mundi.
So what's my point? My point is that it is hedge funds and major banks that shorted TBR after the privatization. As they are forced to liquidate their positions when faced with redemptions (hedge funds) or cut trading limits (banks) they will be buying back TBR, in the same sizes that they sold it. Brokers will then get squeezed again, serving out millions of TBR stock to their desperate and gasping hedge fund clients. Then... We'll have less speculation against the Reale (and possibly buying of it in the liquidation of positions), and the shorts shaken out. Cardoso will win, drawing the support of the Brazilian domestic investor. Fed will cut next week. IMF support in exchange for simultaneous announcements of reform by Cardoso.
So hang in there everyone.
Ordem e Progreso.
Um forte abracao a John Meriwether. |
