Hedge Fund Woes Downplayed
Some Wall Street executives went on the defensive Tuesday over rumors that losses at hedge funds could pose a threat to major financial companies.
Meanwhile, prices of corporate junk bonds continued to slide, driving yields higher, as hedge funds and other investors sought to trim their holdings, traders said.
Wall Street has been inundated with rumors in recent weeks about hedge fund losses stemming from trading strategies involving corporate bonds and other securities that have been popular with the secretive investment pools.
The downgrade of General Motors Corp.’s bonds to junk levels by Standard & Poor’s Corp. on May 5, and the sharp decline in the bonds’ prices, were believed to have caught some hedge funds unprepared.
On Tuesday, executives at brokerage Bear Stearns Cos. and banking titan JPMorgan Chase & Co. downplayed concerns that hedge fund woes could cause broader troubles in the financial system.
“I think the rumors are 99% exaggerated,” Bear Stearns President Warren Spector told a market conference in New York.
He said there have been “plenty of margin calls and lots of people have been shipping in money,” a reference to moves by banks and brokerages to require hedge funds to put up more capital to back loans they’ve taken out to buy securities.
“But the systems we have work, and our clients’ systems work, so we are not seeing a breakdown,” Spector said.
JPMorgan Chase Chief Executive William Harrison said the third-largest U.S. bank doesn’t expect losses on its loans to hedge funds.
“Our hedge fund exposure is, we think, extremely well managed,” Harrison said at the bank’s annual meeting in Chicago. “We are not concerned about hedge fund exposure today. We, to my knowledge, haven’t taken losses on hedge funds.”
Junk bonds overall continued to lose value Tuesday. The yield on an index of 100 junk issues tracked by KDP Investment Advisors rose to a 12-month high of 7.92% from 7.88% on Monday.
Bond traders said it appeared that some hedge funds were selling securities in a preemptive move, to raise cash that could be used to repay their investors who may want to exit after recent losses. Many funds allow investor redemptions only at quarter end, which could mean an outflow of money at the end of June.
Funds that follow so-called convertible arbitrage strategies are expected to be hit hard by investor redemptions, some analysts said. Convertible arbitrage involves trades in stocks and, simultaneously, in bonds that are convertible into those shares.
“A lot of people have been saying that it may be all over for convertible arbitrage” because of fund losses, said Sol Waksman, whose Barclay Group invests in hedge funds and also keeps track of fund performance.
