Hedge Fund Failure Warning From LTCM Man
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The risk that hedge fund failures may cause a liquidity crisis have increased, according to a former senior strategist at Long Term Capital Management. Gerard Connette, worked for the infamous fund that used incredible amounts of leverage, and failed in 1998. Chaos ensued with fears of a widespread market collapse and panic. Gennotte bases his argument on two factors, the weight of money flowing into hedge funds and a drop in profitability. A lesser reason, is constraints on how much money, investors are able to lose. This would have an effect on liquidity. The focus on the risk of a major hedge fund failure or of widespread systemic failure has been heightened this week due to the Ford and GM downgrades. Rumours in the market, prompted two large funds to issue a statement, that they were not affected. He cautions that failures are likely to be at the individual fund level. Systemic risk has largely been mitigated since the 1998 meltdown.
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