Big liquidation triggers hedge-fund turmoil Disruption reminiscent of LTCM collapse

Marketwatch.com ^ | 08/09/2007 | Alistair Barr

[Sleeping Freeper]

The liquidation of a big hedge fund or investment-bank trading portfolio is wreaking havoc in some parts of the hedge-fund business, according to managers and investors. Black Mesa Capital, a hedge-fund firm that uses computer models to track down investment ideas, said that at least one large hedge fund or investment bank is liquidating "massive" trading portfolios, according to a letter the Santa Fe, N.M.-based firm sent to investors Wednesday. 'Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before.' — Letter to Black Mesa investors The warning is causing disruptions and triggering big losses among other so-called market-neutral hedge funds, Black Mesa said in its letter, a copy of which was obtained Thursday by MarketWatch. "Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before," Black Mesa's managers, Dave DeMers and Jonathan Spring, wrote.

[Philly Nomad]

There’s a flaw in the reasoning - he’s not providing enough data.

He’s talking about current subprime and default rates, what we need to do is look at the historical context.

If for example, the % of subprime was say 8% and not 14% and the previous late payment rate was 10% and not 13% then we are looking at a serious shock to the system.

[cgbg]

The panic is all about the fact that investors finally figured out that real estate on both coasts is grotesquely overpriced and bears no relation to the underlying salaries of the people who live there. The ARM resets of sub-prime as well as mid-prime lenders means that many foreclosures are yet to come.

A significant increase in foreclosures increases the supply of housing on the market faster than an increase in the demand. This lowers housing prices which makes it more difficult for more people with ARMS to refinance their homes.

Then the imitation of a toilet drain in the housing market continues.

The refinancing boom of the last few years gave consumers plenty of cash to spend in the economy. That cash is no longer available for this year, next year, and perhaps several years after that.

_That_ is why there is panic.

[terilyn]

You’re a stronger person than I am. Or at least you have a stronger stomach.

I haven’t been able to stomach him for about 6-7 years now since he manipulated some of the tech stocks for his buddies with his Street.com newsletter.

One of those buddies, Gregory Reyes - former Brocade CEO - has now been found guilty on all 10 counts and is going to jail.

I couldn’t be happier.

[khnyny]

bump.

[not2worry]

Interesting way for the Democrats or anyone in power can redistribute the wealth.

I’m sure for folks like Edwards, Kerry/Heinz, Buffet, Soros aren’t feeling the pinch.

Then we got the Chinese, the Russian mafia, the OPEC and Chavez to add to the mix.

Of course, in the end, it will be all the fault of George W. Bush.

An almost October surprise, but then maybe its accelerate due to the primaries being pushed up to the first of the year.

Power or the desire for it begets chaos.

[spyone]

ARM resests increase every month from now through Feb. of next year.

[terilyn]

Yes she will. Hopefully she’ll pepper her commentary with enough “ummmm”’s to sound like the idiot she is.

If it’s not pre-scripted ummmmm is her favorite word. Along with “you know”.

[AndyJackson]

Not only that but as more and more folks found that they bought "at the top" and that they can bail now, get a few months rent free until they are tossed out, and not have 20%$ negative equity, or more, hanging over their heads, they will. Furthermore, as things get worse, the real option for the banks is to renegotiate better payment terms with the delinquent borrower, essentially resetting the value of the loan. The last thing a bank wants is a large portfolio of REO in a sinking market.

So the funds that purchased the CDO's are taking a bath, and they know it. Add to that the default swaps and interest rate swaps and it is all tied together in such a neat package that the damage is systemic.

[Proud_USA_Republican]

OHHHHH MANNN......

[Proud_USA_Republican]

This just hit the wires.

Goldman Sachs is closing down a 700 million fund based heavily on north american investments.

Tomorrow is going to be very interesting. NYSE and Nasdaq better keep those trading curbs warm.

[finnman69]

Hedge fund related meltdows. Coming Soon to a “but it’s different here” housing market near you!

[SauronOfMordor]

Watch Jim Cramer Meltdown on CNBC on youtube