Grantham Says Hedge Funds, LBO Funds to Collapse
Don Tiberone
oversees $150 billion as chairman of Grantham, Mayo, Van Otterloo &
Co. LLC, said credit-market declines may force as many as half of all
hedge funds to close in the next five years.
The loss of investors' appetite for risk also may cause at least one
global bank and ``one or two'' of the largest private- equity firms to
go out of business, Grantham, known for his pessimistic outlook, said
yesterday. The 68-year-old investor said he's still bullish on
emerging-markets stocks.
Hedge-fund firms such as Boston-based Sowood Capital Management LP
have collapsed as investors shun riskier debt including subprime
mortgages and loans to fund buyouts. Bill Gross of Pacific Investment
Management Co. in Newport Beach, California, said on July 24 he sees
``severe ramifications'' for some investors who had benefited from
cheap borrowing costs.
``Probably the most stretched silly credit that ever walked the face
of the earth was subprime, and that was the start of it,'' Grantham
said in an interview in his Boston office. ``And then you started to
see more of the fixed-income market getting contagion.''
A total of 717 hedge funds closed last year, leaving 9,800 in
business, according to Chicago-based Hedge Fund Research Inc. Fund
raising by new hedge funds was hurt by the September collapse of
Greenwich, Connecticut-based Amaranth Advisors LLC, which lost $6.6
billion betting on natural-gas prices.
Spreads Rise
Hedge funds are largely unregistered pools of capital that cater to
wealthy individuals and institutions and allow managers to participate
substantially in profits from investments. They control about $1.74
trillion, more than double the amount five ago.
The extra yield, or spread, that investors demand to own U.S. junk
bonds rather than U.S. Treasuries rose to about 4.28 percentage points
on July 27, the highest in two years, according to index data compiled
by Merrill Lynch & Co. in New York.
Securities firm Bear Stearns Cos., also based in New York, said
investors will get little, if any, money back from two funds that bet
on bonds backed by subprime loans, while Sydney- based hedge-fund firm
Basis Capital Management Ltd. has frozen investor accounts.
`Piling on Risk'
Hedge funds are ``piling on risk of different kinds and presenting it
as outperformance,'' Grantham said. ``In a weak world, they pay the
price of all the risk they've taken. And that is, they melt down.''
Federal Reserve Bank of St. Louis President William Poole, in a
response to a question, said on July 25 that he doesn't expect losses
from defaults on subprime mortgages to spread beyond the real-estate
industry.
Grantham, whose firm managed as much as $6.1 million for U.S. Vice
President Cheney in 2005, correctly predicted a crash in technology
stocks two months before the bubble burst in March 2000. He helped
start Grantham, Mayo, Van Otterloo in 1977.
Grantham said investors putting money into private-equity funds will
lose most of their money because of the amount of leverage used in
deals and profit-sapping fees. An overload of debt will sink at least
a couple ``very large'' firms. He didn't say which firms may be
imperiled.
``These guys are in a big hole,'' he said. ``Most of the money going
into private equity today will be a total loss.''
Buyout firms use a mix of their own funds and borrowed money to make
acquisitions.
Private-equity takeovers of companies such as Dollar General Corp. and
Alliance Boots Plc have taken on more debt than investors can
tolerate. Kohlberg Kravis Roberts & Co., the New York-based firm
behind the Alliance and Dollar General bids, failed to find financing
for its buyout of Alliance, the U.K.'s biggest pharmacy chain.
`Perma-Bear'
Dubbed a ``perma-bear'' by some colleagues for his dour view on U.S.
equities for more than a decade, Grantham said he has never been so
bearish. In April, he wrote a quarterly letter to investors saying the
world is in the midst of a ``global bubble.''
``I have been extremely bullish on emerging-market equities for a long
time, but it won't stay like this forever,'' he said.
Grantham said he still has more of his portfolio in emerging markets
relative to benchmarks. His firm manages the $13 billion GMO Emerging
Markets Fund, which has climbed 51 percent in the past year to beat 80
percent of rivals, according to research firm Morningstar Inc. in
Chicago.
lubow
game were to start now. I would be interested in what stocks you would
pick.
Just so there is no confusion, I'm not soliciting picks for a new game
(don't have the time to track two games -- sorry) but I would like to know
what our gamesters would select given the current economic conditions. And
even if you are not in our game, I still would like to know what your picks
would be.
Thanks.
--
Lubow
Don Tiberone
Sure. This is almost the same list that I gave last month with a
couple of exceptions.
MON
SLV
CNQ
PIO
PBD
TDF
APF
EMF
CHEUY.PK
EDV.TO
I generally follow what people like Jim Rogers, Monty Guild, and Dox
Coxe recommend. So that means mainly energy, agriculture, and emerging
markets.
Jim Rogers was on Bloomberg this weekend. The only 2 countries he's
long in, are Japan and China. And he's always been a commodities and
agriculture bull. And he's still short the dollar, banks, and
homebuilders.
There's a couple of ETFs that short financials and real estate,
symbols SKF and SRS. Although the best bear fund around is still
BEARX.
garyp
We would like you to participate in our Wall Street group!
Pleasse check us out!
http://finance.groups.yahoo.com/group/11WallStreet/