Fitch: Hedge Fund Derivative Borrowing Dangerously High

Jul 17 2007 | 12:40pm ET

A new report shows that hedge funds are borrowing too much to invest in credit derivatives, findings that will surely bolster the arguments of regulators and other hedge fund opponents that hedge funds present a danger to the global economy.

The study, from Fitch Ratings, warns that derivate transactions financed with borrowed money may “result in a number of hedge funds and banks attempting to close out positions with no potential takers of credit risk on the other side” in a market downturn. According to Greenwich Associates, hedge funds are responsible for 60% of credit-default swap trading and a third of trading in collateralized debt obligations.

Fitch noted that the funds’ influence on the credit derivative and debt markets is growing at a “dramatic pace,” as growing problems in the sub-prime mortgage market pushed U.S. corporate bond risk premiums to their highest level in two years. Some $50 trillion worth of credit derivatives were bought and sold last year, more than twice the 2005 level.


In Depth

Direct Lending: What’s Different Now?

Mar 14 2017 | 8:43pm ET

Senior direct lending funds have become riskier over the past four years, with leverage...

Lifestyle

'Tis the Season: Wall Street Holiday Parties Back In Fashion

Dec 22 2016 | 9:23pm ET

Spending on Wall Street holiday parties has largely returned to pre-2008 levels...

Guest Contributor

SEI: Private Debt Coming Into Its Own

Mar 8 2017 | 9:24pm ET

The explosive growth of private debt over the past few years has caused the lines...

 

From the current issue of