Hedge Funds: levered not hedged

The WSJ today reports: Merrill Postpones Auction.  Merrill Lynch postponed its planned auction of $400 million worth of collateral assets from a troubled Bear Stearns Cos. hedge fund, giving the fund's managers additional time to present a plan for salvaging it.

“The problems of the fund are emblematic of broader turmoil in the subprime mortgage market, which has been hit by increased bond downgrades and rising delinquencies on underlying mortgages.

The Enhanced Leverage Fund, initiated last August, has roughly $600 million in invested capital, and has borrowed at least another $6 billion from Street lenders. From the start of the year through late April, the fund declined 23%, hit by a turnaround in the market for risky home loans that the fund had bet against…”

Comment:  more of this will follow.  Leverage is only our friend when prices are going in our favour.  For excellent perspective on this read: When Genius Failed:  The rise and fall of Long-Term Capital Management by Roger Lowenstein.

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