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Politico – On the same day Lawrence Summers was announced as President-elect Barack Obama’s top White House economics adviser, the veteran economist said he would resign as the part-time managing director of one of the nation’s largest and most successful hedge funds, D.E. Shaw & Co.
But even as Summers takes the lead of economic policy thinking for the Obama White House, which has promised to be one of the most open and transparent in history, neither the Obama transition team nor D.E. Shaw would say exactly what Summers had done in his two years of work for the $36 billion hedge fund, or how much he has been paid.
In a press release issued Monday, D.E. Shaw said only that Summers had been working on “various strategic initiatives, high-level research and advising the executive committee on the overall business.”
Reuters – Emerging stocks and bonds slid in a panic sell-off on Wednesday as hedge funds dashed to unwind positions, but Hungary’s central bank tried to throttle a slide in its currency with a three-percentage point rate rise.
The banking crisis that started in developed markets is leading to steep falls in emerging markets, as investors are forced to retrench, analysts and traders say.
"There is a need for hedge funds to withdraw from emerging markets to cover redemptions that are occurring, it is a reversal of the carry trade that is being unwound at a very rapid rate," said Neil Dougall, chief emerging markets economist at Dresdner Kleinwort.
Economist – Hedge funds are supposed to hedge. This year, they haven’t. The fund-weighted composite index compiled by Hedge Fund Research, a firm that tracks the industry, fell by 4.7% in September, the second-worst month on record. Since the start of the year it has lost 9.4%. The industry’s promises of “absolute returns” for investors now ring rather hollow.
To be fair to them, hedge funds have not been allowed to hedge. The restrictions on short-selling (betting on falling prices) imposed by regulators round the globe have played havoc with managers’ strategies in recent weeks.
Take the worst-performing strategy, convertible arbitrage, which lost the average fund 12% in the month. Convertible bonds are fixed-income securities that can be exchanged for shares in the issuing company. Historically, these bonds have been underpriced, because too low a value has been placed on the right to convert them to equity. So arbitrage managers have tended to buy the bonds and sell short the shares. Thanks to the Securities and Exchange Commission’s ban on the shorting of more than 900 stocks from September 19th to October 8th, that strategy no longer worked. And since the managers could not short the shares, they had to sell the bonds. As a result, the bonds’ prices plunged.
