FAST FIVE: Fed Considering Lending Cash Directly To Hedge Funds In Next Repo Market Crisis

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They achieve said leverage using repo.

Which, of course is moot: when the Fed stepped in to launch repos for the first time since the crisis in September, followed by QE4 in October, bailing out hedge funds (in addition to banks, and prop desks, such as JPMorgan's) is precisely what it did then goo.

It doesn'y really matter because hedge fund leverage is now so intertwined with the repo market, any bailout of the banks or the financial system, also explicitly bails out hedge funds, even though “some fear that lending directly to hedge funds could lead to the perception the Fed is fueling risky bets.” “There's a strong aversion to fat cat bailouts,” said Glenn Havlicek, chief executive of GLMX, which provides technology to repo trading desks.

Alas, hedge funds mostly use the borrowed repo funds just to boost leverage and increase potential gains from investments, as shown in the top chart.  Of course, such leverage can also magnify losses.

Finally, as the WSJ correctly notes, some investors say the connections between firms involved with sponsored repos make the distinction between lending to one or the other meaningless.  Gang Hu, a hedge-fund manager at WinShore Capital Partners, said he borrows cash in the repo market to increase the impact of his investments in Treasury-bond futures and other interest-rate products.

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