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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: Paul Kern who wrote (5375)	3/23/2008 6:36:34 AM
From: RockyBalboa	Read Replies (1) \| Respond to of 71463

I think that the most Hedge fund strategies are not exposed to leverage meaningfully, at least that is what they state in their OCs. Long short equity may see some reductions if the portfolio suffers too much and they scale back on the drawdowns. Convert and Capital Structure Arbs perhaps see their long parts lose too much value and suffer because their hedges are sucked dry. Credit spreads is an issue for those folks. As they use some leverage up to 4x or so they may see some heat. The real danger comes from outside: Many strategies receive their investments through fund of funds. Fund of funds (or structures issued on Fofs) are allowed to tack on additional leverage, for example driven by investment allocation mechanisms one being called "CPPI". This worked like rocket fuel in times where the underlying funds performed well. In reverse, the mechanism has to sell more dollars for each lost dollar in equity. It seems that there are a lot of liquidations going on, as the issuers and guarantors of structures can not freely forbear reallocations but are bound to the model. A lot of leverage is in Fixed Income: Mortgage-backed. This strategy sees a lot of problems, and as you say Carlyle is a prominent failure. The other Carlyles were in essence, Luminent, Thornburg. Ellington (which freezed redemptions in 2 funds in October and also liquidated some holdings) and MKP are already mentioned on various webpages and they are not small. After reading various stuff the size of the funds remains unclear and they use an estimated 5x leverage. Some put the funds eqity at 1.844B total but then the leverage would be larger. >>>>>>>> With more than $21 billion under management, Ellington is one of the largest U.S. mortgage hedge funds, along with MKP Capital Management LLC. Created in December 1994 with the Ziff family and six founding partners, Ellington specializes in mortgage-backed securities, investing in distressed situations in the MBS derivatives market. <<<<<<<< Ellington: Message 23944859 For some primer on MBS Arbs, read here: cisdm.som.umass.edu ccfr.org.cn