Are Hedge Funds ‘Too Big to Fail’?

13-Aug-2011

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A banker turned social finance entrepreneur. Liu-Yue built and managed two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a social financial education website that helps facilitate the exchange of ideas on emerging alternative investment opportunities along the new Silk Road. Liu-Yue also co-founded Cute Brands, Inc. Cute Brands is a cause-oriented character-based brand licensing and social impact fund that creates social awareness on global issues and societal challenges through character creations. Cute Brands also supports select charities (WWF, WCS, and ASPCA) through consumerism. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising ultra high net worth clients on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in emerging markets bonds and Latin American equities investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities and special situation investing at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Gregory Zuckerman, WSJ,

Who’s afraid of hedge funds?

A year after Dodd-Frank was signed into law, regulators still have not decided which large financial firms pose a risk to the financial system. Hedge funds want to be excluded.

They may have a point, according to a new paper by two academics at Columbia Business School and a Citigroup executive.

The average hedge fund is “modestly leveraged,” with borrowed money amounting to just over two times the fund’s equity, according to the research. What’s more, funds reduced their leverage ahead of the housing crisis, even as banks increased leverage. In the first quarter of 2009, the average fund was leveraged at 1.4 times its equity, even as leverage at investment banks topped 40 times, says the paper, which is based on data from various funds of hedge funds.

Hedge-fund leverage began falling in the middle of 2007, likely because fund managers were becoming nervous, say the authors, who claim their study is the first to examine actual hedge-fund borrowings, rather than leverage estimates.

So what about Long-Term Capital Management, the big hedge fund that regularly borrowed $30 for each $1 of equity, and saw leverage race to more than 100-to-1 as it melted down and brought financial markets to their knees in 1998? The academic paper only covers the December 2004 – October 2009 period.

Correction:

An earlier version of this post said the two academics working on the paper are professors. One is a professor and the other is a graduate student.

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