To: Broken_Clock who wrote (82999 ) 6/24/2007 9:25:30 AM From: redfrecknj Respond to from Fitch:Leverage added to the continuing surge in credit-oriented hedge fund assets could be a recipe for disaster for investors in the next market downturn, Fitch Ratings warns. The impact of hedge funds “cannot be measured simply by trading volumes,” says Fitch Managing Director Roger Merritt. “One must also consider a funds willingness to employ financial leverage and to be ‘risk takers’ by investing lower in the capital structure. That “effective leverage,” says Merritt, “is what amplifies the impact of hedge funds on the credit markets.” Even without the leverage, hedge funds have certainly made their presence felt. According to the International Monetary Fund, credited-oriented HF assets increased 600% in 2005 from five years earlier, and now account for 60% of the trading volume in the $30 trillion credit default swap market — and employ leverage of five or six times. Fitch says liquidity risk is among “the more important issues facing credit investors in the near-term,” adding that “the inherent stability of hedge funds as an investor class…is distinctly different from more traditional buy-and hold institutional investors.” As a result, in a market downturn, says Fitch, “the potential for a forced unwind of credit assets cannot be discounted, which in turn could lead to correlations that are different than historical expectations.” During a period of market stress, according to Fitch, “any such forced selling of assets would be magnified by the effect of leverage.” The ratings agency points to tight credit spreads and abundant capital as spurring even more access to funding and refinancing maturing debt. “Refinancing risky could be magnified in the next down turn,” says report co-author Eileen Fahey, a managing director at Fitch, “and credit investors need to have a robust view of liquidity sources and uses, including on- an off-balance sheet debt, upcoming maturities and contingent liquidity claims.”
