Moody's issues funds warning

17 August 2007

The collapse of a hedge fund on the same scale as the demise of Long-Term Capital Management in 1988 is a distinct possibility, it has been claimed.

According to Chris Mahoney of Moody's Investors Service, funds could run into trouble as investors attempt to offload liquid investments, leaving the funds unable to exit their positions.

Mr Mahoney did not however identify any specific funds that might be vulnerable.

He said: "A possible consequence of the re-pricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as LTCM threatened to do in 1998."

The impact on markets is attributed by Mr Mahoney to the fact that several financial institutions and asset classes are intertwined, causing the effects to ripple through the financial system.

Mr Mahoney's comments come at a time when a number of high-profile hedge funds have run into difficulty as a result of exposure to the ongoing crisis in the US mortgage market.

Goldman Sachs recently put $2 billion of its own money into a beleagured fund in an attempt to rescue it, while two funds managed by Bear Stearns collapsed last month after suffering heavy losses.

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