Funds Hub
Money managers under the microscope
Batten down the hatches
It’s fashionable now for leading economists and financial wizards to claim that they saw the credit crunch coming and the kind of dislocation it would create. But how many have predicted where the next implosion will occur?
Dr Andrew Lo, founder of hedge fund firm AlphaSimplex, and director of the MIT laboratory for financial engineering, has spent his career studying market behaviour, publishing papers examining why quant funds imploded in August 2007, and trying to reconcile behavioural economics with efficient market theory.
He sees the next big meltdown in commercial mortgages, but this time it’s pensions funds that will bear the brunt of the losses rather than banks. Lo points out that commercial mortgages have been packed and sold in the same way as residential mortgages – different levels of risk exposure sliced and diced and wrapped up together in one package with a triple A rating slapped on top.
But commercial mortgage backed securities (CMBS) are facing the same liquidity problems as RMBS following the sub-prime meltdown. When mortgages start to reset at higher rates this year the defaults will pile up and the losses will hit the end-investor – in this case, large pension funds in the US, Europe and Japan, says Lo.
“We are likely to see a number of pension funds having a hard time meeting their liabilities, and the government may have to step in and help out some of these insolvent funds,” he says.
Why pension funds rather than banks, which had the greatest exposure to RMBS?
Lo says that large pension funds expanded their programmes into riskier areas like CMBS to capture additional yield during the low volatility, low return years.
A loud and clear call
It may not have been a massive surprise, but ECB President Jean-Claude Trichet had an unwelcome message for hedge fund managers today.
The current crisis is, apparently, “a loud and clear call” to roll out regulation to all important market players, “notably hedge funds and credit rating agencies”.
For those hedge fund managers who felt, perhaps with a degree of justification, that their industry had been relatively blameless in precipitating the current crisis, that call may have been somewhat quieter and more muffled.
But the drumbeat of those calling for greater hedge fund regulation is growing and it seems increasingly likely that hedge funds will face a new raft of rules in the not too distant future.
Hedge funds have attempted to justify the slow take up of volunatry codes aimed at staving off heavy-handed regulation, but day-by-day the industry looks like it may have missed the chance of a quiet life… well, relatively speaking.
The trend goes beyond just the mortgage crisis of late. For decades,people have been chasing bubbles trying to get money for nothing, and when one collapsed, they jumped on the next one.
After learning the hard way that the “value” of your “investments” are in the end only worth what you get cash in hand on the day you seel them, they cried for tax breaks on stocks they did sell and made gains from, crying foul for being caught up to their ears in greed in midstream, and the gov forgave a ton of taxes owed.
And through it all, the “experts” have done nothing but beat the bull market wardrum and whip investors and funds into a frenzy. The few who cried wolf back then have had a career riddled with ridicule by the very folks who NOW claim they saw ti coming.
If they saw it coming, the bank stocks should have bottomed ahead of the collapse as they ran to the exits before the fire even broke out.
And only now do the pyramid scams surface, but as the old adage goes, you can’t con an honest man. Folks investing with the scams thought their slick inside connections would get them a ton of money (at the expense of others), and that arrogant greed made them perfect targets.
But this routine has been going on for decades, and other both parties, so stop the bumper sticker slogan finger pointing and do like some countries do: prosecute, bankrupt and permanently discredit all who were willing in on the crisis. It has been as much an assault on the security and future of this nation as any terrorist attack.
At least a mindless drone suicide bomber sacrifices himself. These monsters hide behind connections and legal trickery while they make off with the money.
Too bad we all have to go down with them and be stuck with the bill.