Telegraph: Hedge fund panic was behind global stock markets collapse

[133724]

Panic selling by hedge funds has emerged as the hidden cause of the contagion spreading through the global financial system.

...

Billions were wiped from the value of listed companies around the world on Friday, with Britain's FTSE100 index experiencing its worst day in more than four years.

A trader on the New York Stock Exchange, hedge fund panic was behind global stock markets collapse
Panic selling by hedge funds has emerged as the hidden cause of the contagion spreading through the global financial system

Initially, turmoil was limited to credit markets but it quickly spread to global stock markets after central banks were forced to intervene to keep markets from collapsing completely.

As the world's stock markets pause for breath this weekend, it is becoming clear that hedge funds, which are supposed to help stabilise the financial system by diversifying risk and providing liquidity, were instead at the epicentre.

...


"This is a one-in-a-100-year event in which there are extremely unusual correlations that no one prepared for," warned one banker. "We are in a situation where everyone is very scared."

Financial stability was further shaken as hedge funds' losses mounted, compounding fears that some funds could collapse. Goldman Sachs's Global Alpha fund, the US fund AQR and New York-based Tykhe Capital were rumoured to be in particular trouble, although this could not be confirmed.


http://www.telegraph.co.uk/money/main.jhtml;jsessionid=AT1LSD4GHS2KVQFIQMFSFFOAVCBQ0IV0?xml=/money/2007/08/12/cnmarkets112.xml

[thunder rising]

1. I was a real estate agent in West Palm Beach a two years ago

and my broker told me to stay out of the market. All the property is being bought on speculation. In any market (like the stock market) the last thing that happens before a crash is the speculators selling shares they don't own. Many of the last houses sold in the "Flip this House" gold rush were empty from that point on. Actually, only a minority of the foreclosures result in somebody being kicked out of their house around here.

To F@#$@@#$ bad.

[1monster]

4. Two years ago, I was just finishing up my real estate course to become a

real estate agent. I got the highest grade in the class.

I decided not to get my license because the market around here had softened up very quickly. I was right. Two years later, it is so bad the in a one block radius of my house, there are five houses for sale. One has been up for sale for over a year. The across from my house just got a SOLD sign yesterday, but it is a really nice house that was selling for less than it would have brought three years ago.

[MannyGoldstein]

2. If This Is Caused By Hedge Funds Blowing Up - Then We're Fucked

Based on the instant and strong response of the central banks, I had a feeling this had something to do with hedge funds. Many of these are highly-leveraged, meaning they can lose borrowed money - they can lose much more than their investors have risked, many times more. If a lot of them go south fast, there could be a catastrophic result. For example, Long Term Capital Management which blew up in 1997 had $4 Billion in invested momey but controlled well over $100 Billion in investments. In theory, they could have lost the entire $100 Billion - thanks to intervention by the Federal Reserve Bank, they only lost $4.6 billion.

I suspect that there are 100 Long Term Capital Managements out there now - if they all get in trouble, it will be hard to stop the bloodletting.

[aquart]

3. Is there a reason they aren't outlawed?

[MannyGoldstein]

5. Yes.

Because the rich - who are the exclusive investors in hedge funds - purchase the law.

There's a general presumption that the rich are big boys and girls and the government doesn't have to save them from financial doom. So hedge funds, which only accept rich people as investors, are unregulated. They typically use fancy investment techniques that yield very high returns thanks to the ability to borrow and invest other people's money.

In theory, that's OK - everyone involved is wealthy, so it's their own problem if things tank. But in reality, if a bunch of hedge funds collapse at the same time, then the damage will be uncontained - world financial markets will be really, really hurt. Knowing a little bit about how these things work, my suspicion is that it's actually pretty easy to get into a situation where many or most funds will blow up at the same time. So that's why they should be regulated.

[aquart]

6. Will any rich person be hurt in the making of this collapse?

I'd like something to look forward to.

[MannyGoldstein]

7. If It Is What I Suspect It Is, Then Yes

I don't think that there any way to bail out something that big.

But lot's of non-rich people will also lose.

[aquart]

8. Will it affect any of those ubiquitous trust funds

that fuel the uselessness of the descendants of unpunished criminals?

[Mojorabbit]

9. Probably

and probably a lot of retirement and pension funds are invested too.