August 23, 2007

Hedge Funds Cashing in On Subprime Mess

Key to profits: purchasing credit default swaps

Some hedge funds are actually profiting off of the subprime mortgage debacle and the market volatility that it has helped cause. How so? According to Hennessee Group, a New York-based advisor to hedge fund investors, some hedge funds have been purchasing credit default swaps (CDS) "on subprime mortgage backed fixed income securities and indexes intended to profit from deterioration in credit quality among mortgage borrowers." Hennessee says in a recent release that "the best short-sale theme since 2002" has been that "many hedge funds have greatly benefited from the collapse in subprime mortgages via their short exposure to mortgage lenders and subprime mortgage-backed securities and indexes."

The significant hedge fund losses that occurred in the first half of this year have been the hedge funds "with leveraged long bets on bonds backed by subprime mortgages," Hennessee notes.

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