ARE HEDGE FUNDS THE NEXT TO FALL?

(Via Kevin Drum)

Hedge Funds Squeezed As Lenders Get Tougher
By CARRICK MOLLENKAMP and SERENA NG
March 7, 2008; Page A1
Wall Street Journal

The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back.

Loans from banks and brokerages had allowed hedge funds, which manage some $1.9 trillion in clients' money, to amass many times that amount in investments. But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets.

In the early stages of the financial turmoil, the riskiest securities -- such as those backed by subprime mortgages to people with poor credit -- were hit by selling. Now, as margin calls intensify, hedge funds and others find they must unload even assets perceived as high-quality, such as bonds backed by the government-sponsored mortgage giants Fannie Mae and Freddie Mac.

Brad Alford, founder of Alpha Capital Management, an Atlanta investment-advisory firm, says such funds were exploiting "a lot of small mispricings in the debt markets and were levering up their returns significantly."
Now, says Mr. Alford, "they are facing that once-a-lifetime event that they thought would never happen."