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Strategies & Market Trends : Tech Stock Options
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To: Brad Bolen who wrote (54186)9/29/1998 2:34:00 AM
From: Elroy Jetson  Read Replies (1) of 58727
 
Hedge Funds typically borrow money to go both Short AND Long the same security. Only problem is these "low-risk" straddles cause horrendous losses if market volatility increases past certain tolerances. This is what wiped out LTCM hedges in the collateralized mortgage market. Many funds calling themselves "hedge" simply borrow money to take on huge positions short and long in various securities.

A recent favorite has been borrowing Yen at 1% to buy a commodity like gold, or short a market like Hong Kong. As the banks lending the money get scared by the losses at LTCM, they demand more capital and charge higher rates on the loans. The hedge funds have to close the positions due to margin calls or increased interest costs. If they own gold they have to sell, if they're short Hong Kong they have to buy. Unwinding these positions will have unpredictable effects sending some prices higher and others lower.
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