Unstructured Finance

By Katya Wachtel

Last year was a sorry one for the $2 trillion hedge fund industry, when funds lost 5 percent on average. This year managers are doing better, up more than 5 percent for the year, according to the latest tracking data.

But those returns are a far cry from the 16.4 percent rise achieved by the S&P 500 this year, so what will hedge fund managers – who are supposed to be the smartest, savviest market players on the Street – do to juice returns?

For now at least, they’re not levering up in the hunt for yield. Certainly, they’re not ratcheting up portfolios to the levels seen pre-Lehman implosion, when returns were bountiful, and hedge fund managers reported leverage of 3.4, on average.

While funds are indeed sniffing around for and  investing in more highly-levered products like CDOs and CLOs – as we reported in a recent story on managers eyeing riskier exotic assets - prime brokers and traders say the demand for leverage in the form of borrowed cash from Wall Street lenders has not been high, despite the fact investors are starved for yield.

Data from Citi Prime Finance shows that gross leverage* across all strategies for hedge funds on its Prime Brokerage platform was at 1.74 at the end of August, up slightly from 1.73 in July, after falling for several months from a peak of 1.99 in February.  Overall leverage levels have remained pretty stable, according to the Citi data, between January 2011 and August 2012 – never falling below 1.67 and never going higher than 1.99. Over that 20 month period, the funds on Citi’s platform have averaged leverage of 1.8.

By Matthew Goldstein

There is an opaque financial market where pricing is determined by a cadre of Wall Street banks and private emails show that behind the scenes  many in the market don’t even believe in what they are doing.

The Libor price fixing scandal?  Sure. But what I’m talking about here is the market for the CDOs, which at the end of the day you can still argue did more harm to the world financial system than the allegations now emerging from the Libor scandal.

Don’t get me wrong: I am not defending the apparent misconduct by bankers to manipulate Libor, a benchmark interest rate for lots of commercial and leveraged loans. But it’s still not clear just what the big harm was in the Libor scandal.

By Matthew Goldstein

A few weeks ago S&P telegraphed that it would soon strip the U.S. of its vaunted Triple A rating and downgrade the government’s debt by a slight notch to AA+. And Friday night, the major credit rating did just as it telegraphed.

For the moment, let’s not debate whether S&P is engaging in politics, or should even be in the business of rating the debt of countries. The latter issue, however, is something that our nation’s political leaders and regulators may want to consider at some point.

But for right now, it’s worth noting that over the past decade or so, S&P has moved on downgrading corporate debt and esoteric securities as if it was still operating in the days of the telegraph.