Volatility Starting to Represent Chaos?
October 20, 2008admin No Comments »It is a hard time to trade and leveraged (especially those that are long) investors are feeling double the pain as they are forced to quit. Most of the recent stock market falls have been due to weak hedge funds having to liquidate their positions at any cost because their clients wanted to get out.
Meanwhile in London there is a rumour that spread betting providers which usually thrive on volatility are being forced to rein their own business by hiking overnight interest rates on open positions even as new business slows.
This is because they are struggling to raise funds to cover their own cost of carry, trying to hedge those bets off with futures and options. The game has changed even for the biggest firms; as late as 2006, one leading spread-broker made money from 96% of its clients during their first 12 months on the book. Why bother to hedge when leveraged retail investors were so consistently wrong?
But now the cost of rolling a £1-a-point bet on the Pound vs. the Yen, to name one example, just went from zero to £6.60 ($11.50) per day at one leading broker. Rolling Spot Gold with the No.1 broker now costs some 0.15% per night of the total outstanding consideration.
In the last few days MF Global, the broker of contracts for difference for hedge funds, concerned about the ability of its clients to roll over their positions, is thought to have doubled interest charges to hedge funds for loaning out FTSE 250 stock and is demanding down payments of 70 to 80 per cent of the value of their holdings.
At the same time, hedge fund losses are escalating as clients redeem their cash. Andrew Umbers, head of Evolution Securities is gloomy. ‘As many as a quarter of hedge funds could be out of business by the end of the year,’ he said.
Tags: interest rates, leverage, volatility
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