$50 billion of capital in Hedge Fund Industry is leveraged via structured products – Optima study

WEST PALM BEACH, FL (www.hedgeco.net) – New study conducted by the New York based hedge fund manager; Optima Investments said, �That about $50 billion in total hedge fund capital is invested instructured products.� The study also concluded that while hedge fund�s borrowing results from their desire to achieve enhanced returns, the managers are often not aware of the degree of leveragewithin the industry.

The study noted that the degree of the leverage level employed is not an immediate issue or concern. However, two months of successive low returns could blow the problem out of proportion. The often unseen level of leverage is embedded in structured products which are generally derivative trading instruments usually based on the underlying index or hedge funds. Where a manager invests about $1 million, such managers can in theory have $4 million exposure in group of hedge funds or the underlying index.

The use of structured products in trading has grown in magnitude; the survey conducted by Deutsche Bank also supported such conclusions. The fear according to hedge fund experts is that a prolonged period of hedge fund losses could automatically trigger redemptions which have been built into the products.

Such development could also force managers invested in the underlying products to liquidate their positions. The problem is further complicated if some of those managers have significantly leveraged positions themselves. The domino effect resulting from the situation could spill over to the broader markets.

Jim Hedges, president of LJH Global Investments, a hedge-fund advisory firm based in Naples, Fla. said, “It’s not an immediate concern, but if there are a few poor months in a row for the hedge-fund industry, the problem gets exponentially worse.� Some of these issues arose from the recent redemptions arising from the credit problems of Detroit�s automakers.

Paul Oranika
Email: Editor@hedgeco.net

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