Hedge Fund Loss Rumours Send Shockwaves Through US Markets

by Carla Johnson, Investors Offshore.com

12 May 2005

Rumours that one or several hedge funds may have lost a massive bet on the debt of General Motors sent nervous jitters reverberating around the world's financial markets on Tuesday, tipping many major benchmarks into a nose dive and adding fuel to the argument that the activity of hedge funds poses a risk to overall market stability.

These risks were apparently highlighted when talk of massive losses on debt instruments called CDOs (collateralised debt obligations), which are widely used by hedge funds, surfaced after Standard & Poor's downgraded debt issued by General Motors and Ford.

According to the New York Times, one hedge fund that was supposedly at the epicentre of the rumours was Highbridge Capital Management, which oversees $7 billion in hedge funds.

Highbridge had sent a letter to investors on Tuesday noting that its funds were moderately up so far in May, reversing a loss of 3% during April. An investor with Highbridge revealed that the fund had made an investment tied to GM's securities but that an executive at the firm told him it had not lost money on the trade.

Further speculation surrounding hedge-fund group QVT Financial LP also surfaced. According to reports, the group has taken heavy losses by simultaneously taking a long position on GM's bonds and a short position on the firm's stock.

Deutsche Bank, which reportedly brokered the trades, fell 3.3% as a result, while the broader markets tumbled, including the Dow Jones, which fell 1.1%, the S&P 500, which also declined by 1.1% and the Nasdaq Composite, falling 0.9%.

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