Credit events in the autos sector in May have spurred concerns about hedge fund losses and their impact on the market. April was the worst month for hedge funds since September 2002, and doom-mongers are fearful that May will be even worse after convertible arbitrage and credit funds were caught out by the downgrades of General Motors and Ford Motor Company.
It has been rumoured that some credit hedge funds will have suffered losses of 10%-15% as a result of CDO exposure to General Motors and Ford, according to equity research from Morgan Stanley, and talk of hedge fund bankruptcies has been rife – although none have been confirmed. Combine this with news from the Centre for Economics and Business Research's that 20% of hedge funds will close over the next two years, and it is little wonder that market participants are getting nervous.
But even given the losses that credit funds may have suffered, Morgan Stanley estimates aggregate hedge fund returns to be down only 0.5% in May, with the two aforementioned styles being the worst hit. "It's just not as bad as everyone thinks," says one executive at a leading hedge fund.