Vitaliy
You are brilliant and I wish you were president of the United States.
How great that would be.
Michael and Cedric


On Oct 18, 2008, at 11:20 PM, Vitaliy wrote:

http://www.economist.com/finance/displaystory.cfm?story_id=12381701


An industry suffers, and regulators have not helped

HEDGE funds are supposed to hedge. This year, they haven't. The
fund-weighted composite index compiled by Hedge Fund Research, a firm  
that
tracks the industry, fell by 4.7% in September, the second-worst month  
on
record. Since the start of the year it has lost 9.4%. The industry's
promises of "absolute returns" for investors now ring rather hollow.

To be fair to them, hedge funds have not been allowed to hedge. The
restrictions on short-selling (betting on falling prices) imposed by
regulators round the globe have played havoc with managers' strategies  
in
recent weeks.

Take the worst-performing strategy, convertible arbitrage, which lost  
the
average fund 12% in the month. Convertible bonds are fixed-income  
securities
that can be exchanged for shares in the issuing company. Historically,  
these
bonds have been underpriced, because too low a value has been placed  
on the
right to convert them to equity. So arbitrage managers have tended to  
buy
the bonds and sell short the shares. Thanks to the Securities and  
Exchange
Commission's ban on the shorting of more than 900 stocks from  
September 19th
to October 8th, that strategy no longer worked. And since the managers  
could
not short the shares, they had to sell the bonds. As a result, the  
bonds'
prices plunged.

Perversely, issuing convertible bonds would have been one way for  
banks to
raise capital. But that route has been cut off, a typical example of the
unintended consequences of meddling with the markets in response to  
populist
pressures.

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