Moody's Investors Service Inc. raised the spectre that the global credit crunch could become serious enough to trigger a major hedge fund collapse, on a day when many market signals suggested that many of those funds are liquidating assets to free up cash.
"A possible consequence of the repricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as LTCM threatened to do in 1998," Moody's vice-chairman Chris Mahoney said during a conference call yesterday, referring to the collapse of U.S. hedge fund Long-Term Capital Management LP.
The global tightening of credit markets has already shaken the hedge fund industry, and their troubles have infected financial markets in general over the past week or so, amid news of serious troubles at hedge funds operated by big names Bear Stearns Cos., Goldman Sachs Group Inc. and BNP Paribas SA. Yesterday's market volatility had the stamp of hedge funds on it, as some of the key market segments in which those funds have been significant investors - such as commodity plays, small-capitalization resource stocks and emerging markets - saw some of the heaviest selling.
Evidence from major brokerage desks indicated that there wasn't an all-out rush to sell among hedge funds yesterday, and there was no sense that Canadian hedge funds were facing widespread margin calls. However, the funds were active sellers of a variety of assets - particularly U.S. funds, which are more heavily leveraged than their Canadian counterparts and are more desperate to free up cash.
Colin Stewart, portfolio manager at hedge fund manager JC Clark Ltd., noted that the high volume of trading in "large, liquid" Canadian stocks - such as BCE Inc. and Manulife Financial Corp. - is an indication that hedge funds were busy.
"That would have to be interpreted as institutional selling in some form," he said, adding that any funds that felt they needed money fast would probably be selling big-name stocks first because they are the ones with the biggest pool of potential buyers.
"When you want to raise cash, you go to the stuff that is most liquid," he said.
Robert McWhirter, president and portfolio manager at hedge fund firm Selective Asset Management Inc., said yesterday's wild markets may have reflected a growing urgency for hedge funds to raise cash before the end of the month, when they would have to pay out any redemptions sought by their investors. Because investors typically have to request redemptions some time before the end of the month, he said, people in the industry have been talking about Aug. 21 as "a line in the sand" - the time at which the funds would face the reality of redemption obligations.
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