Stock Analysis One more Hedge Fund Warns- Basis Capital This Is Just The Beginning!!!
byon 07-03-2012 at 11:17 PM (226 Views)
"Wow, its just beginning and its not going to stop. Basis Capital is an Australian hedge fund. They run about a billion dollars below management. What you have to maintain in mind however is that hedge funds use LEVERAGE, huge leverage. The average hedge fund manager in the United States is using 6 times the capital base of the money he is managing, as leverage. In the race for performance or the elusive alpha, some hedge fund managers are pushing the envelope and using as much as ten occasions leverage. This can cause significant difficulties since when leverage goes against you, its DEADLY.
An example is now the newest announcements coming out of Basis Capital. Apparently this hedge fund was invested in the US home loans to investors are less than creditworthy. The hedge fund claims that the collateral in their portfolio is sound, but sound is a matter of judgment. Unfortunately for Basis Capital, the prime broker clearing for the hedge fund doesnt agree with them. The prime broker has re-priced this so-referred to as sound collateral.
What does it mean?
The hedge fund now has to go into a crisis mode to survive. Immediately a lot of investors will ask for their cash back. This is the step that kills off the hedge fund. In order to stop a run on the bank, as they like to say, the hedge fund has announced that they could restrict redemptions, which is the right of the investor to withdraw their cash at, will. If investors are permitted to withdraw their funds, the collateral securing the underlying investments usually collapses because other smart money knows that that collateral has to be sold in order to fund the redemptions.
Prior to originating a hedge fund, most hedge funds will install restrictive covenants in their investor agreement that build in what are called gates. These gates limit by quarter what can be withdrawn from the fund. Its about self-preservation. In this case Basis Capital and its two hedge funds demand 90 days notice before capital can be withdrawn. As soon as once more this policy attempts to avoid a forced liquidation of the underlying collateral securing the hedge funds investments.
Basis Capital has warned that the true extent of their problems may well not become evident until September. What does that mean? These folks mark to marketplace every single day. They have the finest personal computer pricing systems in the globe. PhDs in mathematical modeling are a dime a dozen in the hedge fund industry, and yet this hedge fund doesnt know where it stands financially. This is a breakdown in the technique, and it has wonderful meaning to the rest of the hedge fund market.
What occurred to Basis Capital is quite easy. In the range of assumptions they utilised to make their bets they determined regular danger parameters. They did not give any consideration to the possibility that the investments they were producing might, just might move outside their standard variability ranges. In other words they excluded worst-case possibilities from their consideration. The melt down of the sub prime lending market is such a possibility and it has Happened. For an elaboration of this article, please see our site. human resources manager"