Turkish Daily News – The recent rout in financial markets has once again sparked talk of possible hedge fund failures and the threat they might pose to financial stability.
European stocks have tumbled more than 10 percent since May 11, while in emerging markets Indian shares on Monday alone fell more than 10 percent, their biggest one-day fall ever.
Emerging market currencies have also felt the pain with the Turkish lira down around 14 percent since early May and in commodity markets copper prices have dropped by about 15 percent since hitting a record high on May 11.
Could a hedge fund collapse? And could it really shake the world’s financial system in the way that U.S.-based Long Term Capital Management (LTCM) did in 1998?
Possibly, but perhaps not in so clear cut a way as the market rumor-mill would have it.
Nicolas Campiche, who heads a group that selects hedge funds for clients of Pictet et Cie said another LTCM-like collapse is possible. “I don’t want to rule it out… [But] The biggest risk lies with the [hedge fund] counterparties.”
Counterparties include brokers and banks’ prime brokerage divisions, which act as custodians, offer settlement services and also lend money to hedge funds so they can leverage up their investments.
If hedge funds lose the money they have borrowed and cannot repay then the prime broker also loses money.
“What could really have an impact on financial stability is if a prime broker were to go bust,” Campiche said.
