Hedge fund fallout

Louis Proyect lnp3 at panix.com
Mon Sep 28 07:13:52 PDT 1998

Financial Times, September 28

by William Lewis and Tracy Corrigan

The fall-out from the near collapse of Long-Term Capital Management, the hedge fund rescued from near liquidation last week, has hit at least one other US hedge fund and several investment banks.

Convergence Asset Management, a bond arbitrage fund run by Andrew Fisher, a former Salomon Brothers' star trader, has warned investors that the value of the fund is down 15-20 per cent on the month and just under 30 per cent for the year to date.

"Hurricane Long-Term blew through our markets with such force that many were left homeless," Mr Fisher wrote in a letter to investors on Friday, seen by the Financial Times.

"While our house lost shingles and windows, we're still here," he wrote. "These are by no means normal times so I don't want to predict that we won't suffer more market to market losses before things improve. But I believe, for the survivors, the opportunities are great. We intend on being one of the survivors."

Meanwhile, Standard & Poor's, the US rating agency, has expressed concerns about the worsening outlook for financial institutions. The agency said it had downgraded Bankers Trust, was considering downgrading Lehman Brothers and had revised the outlook for four other securities firms, including Merrill Lynch and Goldman Sachs, from stable to negative.

Long-Term Capital, run by John Meriwether, another former star bond arbitrage trader at Salomon Brothers, is being rescued through the injection of more than $3.5bn (£2.1bn) by 14 financial institutions. At its height, Long-Term Capital's actual total market exposure reached about $200bn, according to people close to the fund, and currently stands at $100bn. Its notional gross market position, adding together the value of all outstanding derivative and other financial contracts, could be several times that.

Convergence has equity of "a little bit less than" $500m, according to people close to the fund, and has at times leveraged that up to 15 times, more than most hedge funds but far less than Long-Term Capital.

Like Long-Term Capital, Convergence specialises in bond arbitrage trading - attempting to exploit differences between bond prices to make a profit. However, people close to Convergence say that, unlike Long-Term Capital, it has stuck closely to its core bond arbitrage investment strategy. "I'm not confident that LTCM lost money in bond arbitrage," one person close to Convergence said.

Meanwhile, in Washington, Robert Rubin, US Treasury secretary, has called for an inter-agency government study of hedge fund operations following the LTCM rescue. The House of Representatives Banking Committee said on Friday it would hold hearings on hedge funds as early as this week.

Louis Proyect


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