More US hedge funds may blow up this year, say analysts

18 August 2007

Mumbai: US housing loan woes will see the exit of a record number of failures this year in the hedge funds industry, which currently manages funds worth about $1.75 trillion.

Several funds leave the industry every year, but their exits will be more pronounced this year after a meltdown in US sub prime home mortgage lending spread to other sectors and caught both funds and managers off guard, analysts said.

While a umber of funds have amassed huge losses, two prominent funds, Bear Stearns and Sowood Capital, collapsed recently, and an ailing fund run by Goldman Sachs got a $3 billion cash injection this week.

Hedge funds' investment strategy worked on market returns averaging 16 per cent from June 2005 to June 2006, nearly double what stocks returned in that period. But a month ago, the funds foundered in turbulent debt markets.

Billionaire Jeffrey Larson's Boston hedge fund lost $1.6 billion of investors' money in the biggest melt-down this year. Much of it occurred during a few frantic days in July, when sub prime mortgage market failures triggered a shock wave that caused the values of many debt securities, like those held by Sowood, to drop sharply.