Hedge Funds: Shades of LTCM Lurk, Only This Time It Could Be Much Bigger

January 22, 2020 | Hedge Funds, Latest News, News
https://dailyalts.com/wp-content/uploads/2020/01/recession-2530816_1280-central-banks.jpg

Central banks say hedge funds and insurance are the new epicenters of risk.

Regulations hobbled banks’ risk-taking abilities after the last global financial crisis. But risk never really went away, it just switched masks. And hedge funds are the new face of unbridled financial adventurism, according to the IMF and the European Central Bank (ECB).

Only now there’s a new factor ratcheting up hazards of another LTCM-like implosion: ultra-low, nay, negative interest rates. If the cost of money is low, free or even better, negative, it inspires risk-taking. Again, riskier assets that provide the promise of even marginally superior rates of return become a magnet for money looking to escape from the shackles of low yields. This money is seeking a speculative destination, not a production-, or employment generating deployment.

So is history repeating itself, and are the eddies of risk swirling out ever more further? LTCM in 1998, then the subprime crisis a decade later in 2008; is something bigger in scale lying in wait to spark the next recession?

Nobel laureates, leverage and a Russian default caused the LTCM implosion. Banks and profligate lending triggered the GFC. According to the ECB, hedge funds and insurers may be the next bad actors.

ECB: Hedge funds, risk, and recession

The ECB’s Financial Stability Review of November 2019, says: “Higher leverage, for example, in hedge funds, can add to procyclical investor behavior and accelerate outflows. So, a sudden and abrupt repricing of risk coupled with large outflows could force asset sales, amplifying the original shock to asset prices. In turn, this may have implications for the ease and cost of corporate financing, which could exacerbate any real economic downturn.”

Non-banking financial sector holding the bag

Post-crisis, central banks sought to jump-start sputtering global growth with a massive injection of liquidity amidst an unprecedented low-yield environment. Unfortunately, a lot of the liquidity seems to have ended up at the doors of the non-banking financial sector.

“That’s an unintended consequence of the flood of central bank liquidity,” says an op-ed by author W. E. Messamore in CCN. “Systemic financial regulations designed to recession-proof the economy are tailored for banks. The $3.2 trillion hedge fund sector could be the weak point where the dam finally bursts.”

Furthermore, here is a warning from the IMF:

“Vulnerabilities among nonbank financial institutions are now elevated in 80 percent of economies with systemically important financial sectors (by GDP). This share is similar to that at the height of the global financial crisis. Vulnerabilities also remain high in the insurance sector. Institutional investors’ search for yield could lead to exposures that may amplify shocks during market stress: similarities in investment funds’ portfolios could magnify a market sell-off, pension funds’ illiquid investments could constrain their ability to play a role in stabilizing markets as they have done in the past, and cross-border investments by life insurers could facilitate spillovers across markets.”

Perhaps early-warning red flags are already popping up. The Woodford fund collapse, and the suspension at M&G Investments are cases in point.

Related Story:   Liability Mismatch Strikes Again: £2.5 Billion M&G Property Fund in the U.K. Suspended                                                

Free Industry News

Subscribe to our free newsletter for updates and news about alternatives investments.

  • This field is for validation purposes and should be left unchanged.


Alt Insights

January 29, 2020

Venture Capital: The Kobe in “Bryant Stibel & Co”

Venture Capital: The Kobe in “Bryant Stibel & Co”
Shape

Latest Alternative Investment News

https://dailyalts.com/wp-content/uploads/2020/02/bitcoin-2665933_640-binance.jpg
Digital Assets: A Cloud-based, Turnkey Crypto Exchange Solution From Binance
February 18, 2020     Digital Assets

Binance, which is the world’s largest crypto exchange by trading volume, announced Monday the launch of its Binance Cloud. The Binance Cloud is an all-in-one solution for crypto market participants…

https://dailyalts.com/wp-content/uploads/2020/02/currency-3077534_640-polychain.jpg
Venture Capital: Polychain Capital to Raise $200M To Back Crypto Startups
February 18, 2020     Digital Assets, News, Venture Capital

Polychain Capital’s second venture fund, which targets a war chest of $200 million, opened at the beginning of 2020. The crypto venture fund is accepting minimum investments of $1 million…

https://dailyalts.com/wp-content/uploads/2020/02/board-1364655_640-AI-EU-Rules.jpg
Artificial Intelligence: Margrethe Vestager to Announce the EU’s New Regulations For AI Today
February 18, 2020     Artificial Intelligence, Latest News, News

The EU’s rules set to be announced today will thrust on enhancing the region’s competitiveness but will do so with an emphasis on transparency, oversight, and protection of privacy.

https://dailyalts.com/wp-content/uploads/2020/02/window-blinds-932644_640-american-century.jpg
Liquid Alternatives: American Century May Unveil the Very First Non-Transparent ETFs
February 18, 2020     Latest News, Liquid Alternatives, News

Two American Century funds may be the first to test waters as “actively managed” ETFs. Having received the SEC’s approval for its final key filing, Cboe BZX Exchange, Inc. is…

Scroll to Top