Losses At Citadel And Other Hedge Funds Forces Market Lower

With the stock market dropping nearly 10% in the past few sessions, hedge funds are again being blamed for the slide. According to reports from the Wall Street Journal, large hedge fund Citadel Investment Group is being asked by several major banks to post additional collateral to cover big losses on its investments.

Ken Griffin's Citadel is down 40% this year, as bets on stocks, convertible securities and mortgage-backed products have blown-up. While Citadel is clearly having trouble, the firm said they have met all the demands for collateral. Rumors of problems at the hedge fund prompted a conference call two weeks ago. On the call, the firm said it was 30% in cash and Treasurys and had $8 billion in back-up credit lines.

Not only are calls for collateral forcing selling by hedge funds, but hedge fund redemptions are exacerbating the problem. Carl Icahn received $1 billion of redemption notices, investors in Highbridge Capital Management have asked for 15% or more of their money back, Och-Ziff Capital Management (NYSE: OZM) could see withdrawals of 6% of its funds by the end of this year.

This hedge fund thing is a nasty cycle. Here is how it works: Stocks Slide >>> Hedge Funds Need To Post Collateral >>> Pressure From Selling Pushes Stocks Down Further >>> Clients Want Out >>> More Selling >>> More Collateral Needed >>> More Selling >>> More Clients Want Out >>> And so on and so on.

Link to WSJ Article ($)

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