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Just Shoot Me

Bala, 28, Gordon Gekko in the making, pseudo-intellectual, cynic, bibliophile, obsessive compulsive ranter...

The perils of leverage

June 25, 2007

Two hedge funds belonging to the Bear Stearns group have gone bust. The two funds - High Grade Structured Credit Strategies Fund and High Grade Structured Credit Strategies Enhanced Leverage Fund. The shorter version is they got over exposed to sub-prime mortgages and took a hit when the market went south. For the longer version read this. I think close to half a billion of investor money has been wiped out. Considering the relatively tiny(!) amount of money lost this is not as bad as the failures of Amaranth advisers or Red Kite Management, but this threatens to create a domino effect by bringing down the parent company - Bear Stearns. Shades of the LTCM crisis all over again.

Leveraging is the ultimate double edged weapon. It provides you wonderful importunities while you are on a roll, but if you fall then everything goes to the dogs.

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posted by Bala, 7:21 PM

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