Hedge funds are high-risk investment vehicles, and their failure may be more likely than with other investment vehicles. There are numerous ways that these funds become distressed, including cash flow problems following a period of poor returns, excessive leverage, and a lender making a margin call that compels the fund to liquefy assets at a steep discount.
Some high profile hedge funds recently collapsed including:
- Amaranth Advisors LLC – $9 billion fund that lost $6 billion in one week and was accused of market manipulation and “style drift” soon afterwards.
- Bear Stearns – The High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies Enhanced Leverage Fund lost $1.6 billion when the subprime mortgage market collapsed.
- Dillon Read Capital Management – The UBS backed hedge fund accumulated losses of $124 million in a single quarter forcing its closure.
- Sowood Capital – $3 billion fund run by a former Harvard-educated money manager used leverage to invest an estimated $12 to $15 billion. The fund lost more than half its value in the credit market and was forced to sell its remaining portfolio.