Prime Brokers Scrambling to Grab Collateral

by StockJockey

Monday, March 10, 2008 - 8:51 am

Prime brokers are changing the rules of the game for many hedge funds.

Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.....``If you have leverage, you're stuffed,'' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd. Bloomberg

But levered funds are not the only ones having the rug pulled from under them. Tequesta Mortgage fund had been in business for years, but the credit squeeze has become so acute that even the most cautious managers are being forces out of business:

Tequesta was known for avoiding the use of credit to increase the size and risk of its investments; indeed, it had to work hard to convince investors that its aversion to credit risk - Ross had written to investors as early as 2005 that he saw major problems with the credit cycle - would not preclude handsome returns. The fund was also known to be scrupulous in its hedging practices, in order to guard against declines in the prices of its bonds.....Last year, Ross yielded and opened another fund that used slightly more leverage - but only, he told Fortune, to two times capital, which is sharply below the industry average. Fortune

So, who is next?

``It’s not a question of prime brokers deciding which firms live and which don’t,’’ said Odi Lahav, head of the European Alternate Investment Group at Moody’s Investors Service in London. ``They’re trying to manage their own risk. There’s a Darwinian aspect to survivorship in this industry.’’

``Prime brokers are there to do business, not be your friend.’’

But as we saw with Thornburg Mortage, the margin clerks are grabbing any collateral that is not nailed down. It should eventually set up a huge opportunity; but from what level? Bill Gross bought much of the Thornburg paper, but the price discovery process is painful to say the least.

Live ain’t fair. If you need a friend, get a dog.

Hedge Funds Reel From Margin Calls Even on Treasuries
Bloomberg

Anatomy of a hedge fund collapse
Fortune
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