Marketwatch -It’s nearly eight years since the Long-Term Capital Management hedge fund cratered. At that time, the Federal Reserve engineered an extraordinary bailout on the (highly debatable) theory that the financial markets would otherwise be fatally disrupted.
What would happen if there was another LTCM today?
The Connecticut-based institutional service Bridgewater Daily Observations, which itself manages over $150 billion, has been asking this disturbing question and getting a fairly disturbing answer.
In recent issues, Bridgewater pointed out that money invested in hedge funds is now five times higher than in 1998, when the LTCM debacle occurred.
Bridgewater also tried to show through a sophisticated analysis that hedge funds do tend to march in lockstep. That means, paradoxically, that they are vulnerable to the same things: “tight credit, widening credit spreads, and falling equity markets.”
Bridgewater’s summary: “We estimate that an unfavorable environment, in degrees comparable to 1994, 1998, and 2000/01 will cost …equally to about 2/3 of the S&L crisis and twice the size of the Mexican default in 1994 – i.e. it is material, but not system threatening.”
