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A perfect storm for hedge funds and private equity

There appears to be a perfect storm brewing in the private equity and hedge fund markets.

Similarly you cannot avoid the bad news about Bear Stearns
right now with Warren Spector, co-President and co-COO, resigning over
the weekend amid major issues over sub-prime mortgage debts.  Warren’s
responsibilities included overseeing Bear Stearns’ asset management
division, where two hedge funds that fuelled property loans collapsed
earlier this year.  Result? Bear Stearns shares are down 38% from a
high of over $170 in January down to $107.35 in early Monday trading.So
we have a hedge fund market bubble exploding and a private equity
market imploding, with banks and corporates holding the fan that the
excrement will hit.  For example, according to analyst firm CreditSights,
Citi’s balance sheet exposure to private equity funds through its
leveraged lending operations is anything between $22 billion and $27
billion compared to $12 to $17 billion at JP Morgan Chase.  Mind you,
this analyst firm is the same one where analyst David Hendler is
calling for Citi to be broken up into four parts: US Retail,
International Retail, Investment Banking and Brokerage.  Maybe there’s
an agenda in there somewhere.

After last week’s story about Brian Hunter
who lost his bosses $6 billion in a month, we had the story last Friday
of Jeffrey Larson, founder of hedge fund Sowood Capital Management,
crying into his milk during an emotional investors call.  Sowood
collapsed last week after running up disastrous losses
in the credit markets and it’s not surprising that Larson was tearful
as the firm effectively bankrupted itself in a month.  Sowood had over
$3 billion in assets in June but, by the end of July when Citadel took
over, that had been decimated to $1.4 billion.  Oh how the markets can
conspire against you … Larson put it down to sharply higher senior
corporate credit spreads in June, which were unaccompanied by the
expected moves in equities or subordinated credit.   

This news is followed up by Institutional Investor saying that July was “a real downer for hedge funds” with many expected to report double-digit losses of 20% or greater. 

And even IBM get in on the act with their August release of research into Hedge Funds
which states: "A bubble is forming, and as physicists are quick to
point out, bubbles tend to burst. That’s when things could turn ugly … while the hedge fund industry is here to  stay, a shake-out is inevitable."

So, hedge funds bubble is about to burst … so what?  We’ve still got private equity.

Mmmmm … not much better here either as similar stories are starting up about private equity. 

Many
believe the roller-coaster rise of private equity has reached its
zenith, as demonstrated by Blackstone’s recent IPO.  Blackstone’s
co-founders Pete Peterson and Steve Schwarzman vowed years ago that
private was the way to go and that this would always remain the case.
So why have they sold out?  Maybe because they believe the
private-equity markets are over-cooked and wanted to cash in whilst
they could.  After all, according to Fortune,
they not only made $2.6 billion profit from the IPO but, due to their
financial wizardry, will also manage to avoid the $400 million they owe
in capital gains taxes on the IPO thanks to the benefaction of their
new employer … the publicly listed Blackstone Group LP.

Either way, banks and markets are
hugely exposed to these leveraged organisations and whilst times were
good and the going was easy, all was well in the financial backyard.
Now that these opportunistic’s have hit the wall, watch very carefully
the next few months.  There could be blood on the tracks before too
long …

… meantime, for those into conspiracy theories, check out this YouTube special entitled: "Blackstone IPO = Bush =Skull & Bones=Death = Satan ; Get it?"  If you can’t be bothered to watch the vid then the story is all revealed at this link
where you’ll find that Steve Schwarzman, Blackstone’s co-founder, was
part of the Skull and Bones group at Yale, otherwise known as the
Brotherhood of Death, along with other notable figures including a
certain George Walker Bush.

No wonder money can be pocketed and taxes avoided so easily, some would say.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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