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

Bob Doll's Ten Market Predictions For 2016

Jan 7 2016 | 9:37pm ET

Well-known market strategist Robert Doll has published his annual list of ten predictions...

Lifestyle

Citadel's Ken Griffin Donates $40M To New York's Museum of Modern Art

Dec 22 2015 | 9:23pm ET

Citadel founder Ken Griffin has donated $40 million to New York’s Museum of Modern...

Guest Contributor

Hedge Fund Marketing - Making the Most of Your Salesperson

Jan 20 2016 | 8:11pm ET

In this contributed article, Bruce Frumerman of Frumerman & Nemeth takes a close...