Hedge Funds During the Credit Crisis: How Have They Performed?

Hedge fund Magnetar Capital had returned 25 percent in 2007 with a strategy that posed significantly lower risk to investors than the S&P 500. Magnetar had made more than $1 billion in profit by noticing that the equity tranche of CDOs and CDO-derivative instruments were relatively mispriced. It took advantage of this anomaly by purchasing CDO equity and buying credit default swap (CDS) protection on tranches that were considered less risky. Now it was the job of Alec Litowitz, chairman and chief investment officer, to provide guidance to his team as they planned next year's strategy, evaluate and prioritize their ideas, and generate new ideas of his own. An ocean away, Ron Beller was contemplating some very different issues. Beller's firm, Peloton Partners LLP, had been one of the top-performing hedge funds in 2007, returning in excess of 80 percent. In late January 2008 Beller accepted two prestigious awards at a black-tie EuroHedge ceremony. A month later, his firm was bankrupt. Beller shorted the U.S. housing market before the subprime crisis hit, and was paid handsomely for his bet. After the crisis began, however, he believed that prices for highly rated mortgage securities were being unfairly punished, so he decided to go long AAA-rated securities backed by Alt-A mortgage loans (between prime and subprime), levered 9x. The trade moved against Peloton in a big way on February 14, 2008, causing $17 billion in losses and closure of the firm.This case analyzes the strategies of the two hedge funds, focusing on how money can be made and lost during a financial crisis. The role of investment banks as lenders to hedge funds such as Peloton is explored, as well as characteristics of the CDO market and an array of both mortgage-related and credit protection-related instruments that were actively used (for better or worse) by hedge funds during the credit crisis of 2007 and 2008.

Download Full-text

Hedge Funds in Emerging Markets

10.1017/cbo9780511493331 ◽

2001 ◽

Cited By ~ 14

Author(s):

Gordon de Brouwer

Keyword(s):

Emerging Markets ◽

Hedge Funds

Download Full-text

Institutional Investors on the Securities Market

Voprosy Ekonomiki ◽

10.32609/0042-8736-2003-8-95-101 ◽

2003 ◽

pp. 95-101

Author(s):

O. Khmyz

Keyword(s):

Financial Crisis ◽

Capital Market ◽

Hedge Funds ◽

Institutional Investors ◽

Securities Market ◽

Main Role ◽

Investment Funds ◽

Investment Process ◽

The Capital Market

Acording to the author's opinion, institutional investors (from many participants of the capital market) play the main role, especially investment funds. They supply to small-sized investors special investment services, which allow them to participate in the investment process. However excessive institutialization and increasing number of hedge-funds may lead to financial crisis.

Download Full-text