Financial Crisis: Hedge Fund Turmoil Is
Hitting Millions of Savers, Experts Say

Millions of Savers Have Been Warned Their
Pensions and Investments Will Be Hit Badly
by the Turmoil Now Engulfing the Hedge Fund Industry

By Harry Wallop, Consumer Affairs Editor
UK Telegraph
October 24, 2008

Though very few private investors have their money tied up in hedge funds, everyone who owns shares will be affected – including the estimated nine million people whose pensions are invested in the stock market.

In recent days the future of the $2 trillion (£1.3 billion) hedge fund industry has looked increasingly precarious. One leading player predicted on Thursday that more than a quarter of the world's 8,000 hedge funds could collapse.

Many have already started to fail, and their troubles are one of the main reasons why the London stock market fell so heavily on Friday, wiping billions of pounds of savers' pension pots.

Mark Dampier, the head of research at financial advisor Hargreaves Landsown, said: "It affects the man in the street, for sure. If you've got an endowment maturing, or you are coming up for retirement and need to buy an annuity – you will see your savings worth much less than before.

"Hedge funds de-leveraging is dragging the whole market downwards."

The hedge fund industry has doubled in size in the last three years and proved to be one of the most powerful forces in the global financial system.

Hedge funds came about as an alternative to traditional fund managers, who invest clients' money on their behalf, in stocks, bonds, property and other assets.

Whereas a traditional fund manager's strategy is to "beat the market", hedge fund managers promise – in return for a large fee – to make "absolute returns" for their clients, making a profit even if the stock or property market is falling.

However, an increasing number of hedge funds moved away from these roots to take increasingly sophisticated bets.

The concern over hedge funds is that they are leveraged. That means they have borrowed money to invest in stock markets.

Paul Kavanagh, Chairman of stockbroker Killik Capital, said: "Some funds have borrowed up to £100 for £1 they have invested. What we are seeing is massive deleveraging, as market volatility increases."

This means that the hedge fund managers are having to pay back the debt to their lenders, but they need to sell assets rapidly to raise the money.

This has created a "wall of distressed selling", according to Mr Dampier.

The situation has been exacerbated by hedge fund investors – mostly institutions and super-rich individuals – asking for their money back. Again, this has forced the hedge funds to sell assets, which has forced down the price of many shares.

"They are trying to dress up the stock market falls as investors reacting to the GDP figures, but most of this is forced liquidation by the hedge funds," said Mr Kavanagh.

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