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To: IceShark who wrote (6977)	9/24/1998 4:25:00 PM
From: jim m.	Read Replies (1) \| Respond to of 86076

Thursday September 24, 2:52 pm Eastern Time READ LAST 2 PARAGRAPHS Hedge funds -- the high rollers of the markets By Andrew Priest LONDON, Sept 24 (Reuters) - Hedge funds -- the oddly misnamed investment firms which have become notorious for placing huge market bets -- have a key but potentially dangerous role in global markets. The decision late on Wednesday by U.S. authorities to get involved in the rescue of one of the world's largest hedge funds shows how important these mysterious firms have become for regulators and financial leaders. Analysts said the $3.75 billion bank bailout of Long-Term Capital Management (LTCM), as brokered by the Federal Reserve Bank of New York, was vital to avoid huge losses at banks which in turn could have led to sharp moves in all kinds of markets. The hedge fund industry is estimated to total $300 billion, but their use of bank borrowings, or leverage, means their exposure to markets can be even larger. ''If you allow a forced liquidation of such a large hedge fund's major positions then you could have a disastrous effect on global markets,'' said Nichola Meadon, managing director of Tass Management, a consultant for the hedge fund industry. ''Losses would cause a domino effect through the hedge fund industry not to mention the banks and securities houses who hold similar proprietary positions,'' said Meadon, based in London. Here is how it works: -- Wealthy private individuals or institutions invest money in a hedge fund, which has been set up to trade markets aggressively. Many traditional funds, such as pensions and mutual funds, are far more conservative. -- The hedge funds develop close relationships with banks, which value the heavy turnover generated by these market specialists. -- The funds, when they trade, borrow money from the banks and take positions in the markets. -- If the trade goes favourably, there is no problem. If it goes the wrong way, a bank will call on the hedge fund to put up more money behind the transaction, referred to as calling in a margin. But markets are so shaky these days that banks have turned cautious. ''As volatility has increased over recent weeks, lenders have increased the cushion, or ''haircut,'' they require to continue running the positions with hedge funds,'' said John Leonard, banking analyst at Salomon Smith Barney in London. As markets have fallen, the fall in funds' capital has meant they have had to close out positions to meet margin payments, adding to the selling pressure on the markets. More than three-quarters of hedge funds recorded losses in August with more than a quarter falling over 10 percent, according to Managed Accounts Reports, a U.S. hedge fund consultancy. Analysts estimate LTCM, a bond market arbitrageur, held positions totalling $100 billion or more by mid-September, supported by capital of only $500 million. The fund's capital was more than $4.8 billion in June. ''Running large, heavily leveraged positions...makes (hedge) funds the weakest link in the financial system and that link appears to have been broken,'' said Adrian Davies, senior bond analyst at ABN Amro in London. Tass's Meadon said not all hedge fund positions are fully collateralised. The terms vary according to the nature of the relationship between the hedge fund and securities firms. ''The leverage provided by counterparties is anything from gentle to exceptionally generous,'' she said. Hedge fund losses can send shockwaves with alarming speed. Sohail Jaffer, chairman of the London-based Alternative Investment Management Association, said trading in emerging markets showed this all too clearly. ''As hedge funds with leveraged positions have liquidated to meet margin calls from banks, this has had a cascading effect through the global system,'' said Jaffer. Of the 3,000 or so hedge funds in operation -- the vast majority based in the United States -- the most affected by the current global turmoil are emerging market and global macro funds. The guru-like status of many fund managers such as Quantum's George Soros and LTCM's John Meriwether has meant investors have flocked to their global macro funds, which invest in all kinds of assets worldwide. A proprietary trader at a London-based investment bank estimated the assets of the largest macro and emerging market funds could total around $50 billion to $60 billion. With leverage, the market exposure of these funds would be more than $500 billion, he said. Raising the spectre of the crash of 1987, Leonard of Salomon Smith Barney said hedge fund losses had the potential to snowball. He stopped short of predicting such a catastrophe, but said LTCM's problems were by no means unique. .