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To: Defrocked who wrote (7100)	9/28/1998 9:48:00 PM
From: Joseph G.	Read Replies (1) \| Respond to of 86076

<<Tuesday September 29 1998 Hedge funds face failure as borrowing costs surge SHEEL KOHLI in London and DUNCAN HUGHES in New York Hedge funds began experiencing an investor backlash yesterday as reports emerged that financing costs had soared by more than 200 basis points in the wake of the unprecedented bailout last week of the giant Long Term Capital Management. Brokers who deal on behalf of hedge funds and construct often complex derivative products for the industry are understood to have ramped up the cost of borrowing for highly leveraged funds. The move could force several more hedge funds out of business. It also emerged yesterday that another US hedge fund may have run into difficulties. Convergence Asset Management, a bond arbitrage fund similar to LTCM, has seen a 15 to 20 per cent fall in its value on the month, and down 30 per cent in the year to date. Hedge funds also said last night they had seen overnight escalation in capital-to-risk margin financing levels demanded by lending banks. Several hedge funds said it was rising closer to the so-called "Reg-T" standard of 50 per cent capital-to-risk level enforced in the US. A London-based hedge fund manager with large investments in Asia said the unfolding scene was "an unmitigated disaster based purely on a herd-like mentality". An influential New York-based banking analyst yesterday warned the problems that caused Long Term Capital Management's financial crisis would spread from hedge funds to banks and specialist mutual funds. Charles Peabody, senior banking analyst for Mitchell Securities, warned the crisis was going to "sling-shot across the world" from one product to another. Mr Peabody said: "In a fully deregulated system it is difficult to predict where the next implosion will occur." He estimated that the notional value of the US banking system's exposure to leveraged derivatives at US$26 trillion. Mr Peabody, a long-term critic of high levels of debt within the banking system, estimated that 95 per cent was concentrated in the top-eight US banks. "Most is over the counter, so it is hard to value and it is also hard to liquidate. So we have a very difficult situation. "The banks are attempting to keep things quiet because they are scared to death. They do not know how to deal with it." The London-based hedge fund manager said the combination of sharp anti-speculative measures, such as the imposition of capital controls in Malaysia and the seven-point plan unveiled by the Hong Kong Monetary Authority earlier this month, was making life very difficult. Added to the "near-panic exhibited by many banks who deal with us, it is becoming quite tough to operate", he said. Several brokers reported that part of the sharp 3.17 per cent rise in the Hang Seng Index yesterday was due to hedge funds closing out long-standing short positions in the Hong Kong market to help them meet rising financing costs and margin calls. "I would have hoped the prime brokers and the banks would sit down and review their positions client by client, but I am afraid they seem to be implementing an across-the-board hike in rates, because of the perception that there are more problems than not," said one Tokyo-based hedge fund manager. He said hedge funds in general had been taken by surprise over the degree of volatility in markets in recent weeks. "The events that have been happening are right outside the experience of markets in the last 25 years. You have to go back to the 1930s to seen anything like this again. "I think LTCM is just one of many that got their face ripped off in August." Hedge fund consultants warned yesterday that the funds could also be faced with mass redemptions, as investors become concerned about the vulnerability of their investments. "Where there might be palpable concern is in the reaction of their clients, who might want to take their money away," he said. There is also a fear among hedge funds that financial regulators around the world would feel compelled to impose sterner levels of disclosure and transparency. At the weekend Hans Tietmeyer, head of Germany's central bank, the Bundesbank, said transparency should be enforced on hedge funds, and urged the issue be taken up at next month's meeting of the International Monetary Fund. The issue has already been raised at a European Union meeting in Vienna, and most agreed institutions not covered by regulators had to be made more transparent.>>