Date posted: March 14, 2008

A Reversal of Fortunes

Until about a year ago U.S. and European financial institutions were scrambling to buy a stake in Chinese banks and insurance companies. March 2005 ING acquired a 19.9 per cent in Bank of Beijing. June 2005 Bank of America agreed to purchase a 9 percent stake in China Construction Bank. August 2005 Merrill Lynch bought a 10 percent stake in Bank of China. September 2005 UBS invested USD 500 million in Bank of China. January 2006 Goldman Sachs, Allianz and American Express acquired a 10 percent stake in the Industrial & Commercial Bank of China. As recent as April 2007 ABN Amro was still eyeing a 20 percent stake in Huishang Bank.

When the credit crisis hit all of a sudden the roles were reversed. Now so called sovereign wealth funds from the Middle-East, China and other Asian countries came to the rescue of U.S. and European banks. Last October Chinese CITIC Bank, a state-owned financial services group, acquired a 10 percent stake in Bear Stearns. Morgan Stanley agreed to sell a $5 billion stake to the China Investment Corporation. Chinese insurance company Ping An invested 2 billion in Fortis.

With the effective collapse of Bear Stearns, March 14, and the surprise announcement by Credit Suisse on February 19, little more than a week after the presentation of its 2007 figures, and a day after the Qatar Investment Authority bought a $500m stake in the company, that it would write down $2.85bn because it “had identified mismarkings and pricing errors by a small number of traders in certain positions in [its] structured credit trading business”, SWF’s may become a little more cautious.

February a fund managed by London based hedge fund Peloton Partners won an award for best new fund of the year. In an interview with the Financial Times, February 3, 2008, founder and director Ron Beller predicted that the credit crisis would worsen but that Peloton was ready: "These are terrific trading markets," he says. "There's a lot of volatility and uncertainty and these are the conditions where we find good trading opportunities."

A month later, on February 28, its $2bn flagship fund collapsed and its assets were put up for sale. Its other $1.6bn multi-strategy fund is being wound down, its office has been put up on the market.

August 2007, when the subprime crisis first hit and financial markets were in turmoil, everyone in the financial industry was worried about the systemic risk from hedge funds collapsing. December 20, 2007 the Financial Times wrote that hedge funds were examining their exposure to bank defaults. Again on February 14 the Financial Times reported that “some of the world’s biggest hedge funds have reviewed agreements with their bankers, assessing whether assets and cash left with the prime brokers are safe.”

In its June 2007 Financial Stability Review (p. 10/11) the ECB noted that hedge funds may contribute to financial stability. In its December 2007 Financial Stability Review the ECB wrote that “The indications so far are that the hedge fund sector was relatively unaffected by the recent market turmoil. Nevertheless, some uncertainties remain regarding hedge funds’ exposures, leverage and liquidity risk.”

The wheel of fortune never stops turning.