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Funds must sell to cut US losses

Hedge funds are clamouring across the world, particularly in emerging markets to reduce overall losses, reports Arun Kumar.

business Updated: Aug 10, 2007 21:00 IST
Arun Kumar

Hedge funds are clamouring across the world, particularly in emerging markets, to reduce overall losses. And India cannot be an exception, feel fund managers. Although India has not suffered much yet--foreign fund managers have withdrawn only $800 million since July 27 experts feel the market will remain volatile at least till the US sub-prime mortgage crisis is quantified.

With estimated assets of around $1.5 trillion, hedge funds have contributed to the enormous liquidity in financial markets in recent years.

Now, they are facing redemption pressure after the crash in the sub-prime mortgage market in the US, which forces them to liquidate assets across the world, mainly in emerging markets where they have made supernormal profits, a leading hedge fund executive says.

Since the US happens to be the biggest source of funds across the globe, any disturbance there has a ripple effect, says Yogesh Kapoor of Enam Financials.

Total debt and equity issuance in the US was $81 billion in 1980, which grew to $4 trillion in 2000 and reached $7.5 trillion in 2007.
Although India is yet to witness a selling spree, eventually the pressure will mount, Kapoor adds. Funds like BSW, a hedge fund based out of Germany, have huge exposures in the US with redemptions having touched $800 billion.

“Since it is difficult to sell in the US as many of the funds have not earned superlative profits, it has booked profits in emerging market such as Taiwan and India,” a hedge fund executive says.

“Since the devil (the size of the problem) is not known, it creates more fear among investors and every one wants to be ready for the worst,” says Amitav Chakraborty, head of equities at Religare Securities.

Hedge funds have invested heavily in finance companies that have exposures in the US sub-prime mortgage market. As house prices crashed by as much as 30-40 per cent in the US, home loan borrowers stopped repaying their loans and surrendered the property to buy a similar house at a lower cost.

The ABX BBB index, which tracks the value of the riskiest sub-prime assets, has dropped from 100 at the start of 2007 to about 45 at the end of July, resulting in a widespread rise in risk aversion among hedge funds that have till now been an important source of liquidity in this market.