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Derivatives

Hedge Funds Face Margin Call Clampdown

Credit hedge funds report dealers are increasing margin call frequency in the wake of recent mark-to-market losses on collateralized debt obligation trades.

Credit hedge funds report dealers are increasing margin call frequency in the wake of recent mark-to-market losses on collateralized debt obligation trades. One fund manager said this is adding to the pressure on funds, which are also facing dealers unwilling to provide liquidity in the structured credit market (DW, 5/2). Dealers said this is because they have already reached risk limits for volumes of CDO equity tranches they can hold and hedge.

On top of losses from holding equity tranches of CDOs, funds are also believed to be suffering from losses through selling the mezzanine tranche, which they did to hedge the equity position. Reports funds have lost on both legs of these popular trades have forced dealers to rethink their exposure to highly leveraged credit funds. Robert McWilliam, head of counterparty exposure management at ABN AMRO in London, agreed there has been a pickup in margining activity. He noted it is hard to see when margin calls might go back to normal, because current credit volatility seems to be triggered more by investors' nerves than credit market fundamentals (DW, 5/16).

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