Hedge Funds Towelling Off?

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Are hedge funds as protected from subprime as they might think? Many large hedge funds have split off their excess cash and invested it with Bank of New York. When asked by one short-selling New York fund (who’d been repeatedly approached by the bank, pushing the “added-value” of its money market funds as a selling point) if derivatives were imbedded into the money market funds they direct HFs into, BNY stared and the floor and mumbled nervously, finally providing the answer (six weeks later) that derivatives are indeed tied up in the funds being pushed to the Street, but they couldn’t (wouldn’t? Which is preferable?) say which derivatives and the percent of derivatives in each account.
Apparently, asset-backed investments are not uncommon in money market funds. One of BlackRocks's MM funds has an almost 30% exposure to ABS, including straight MBS. Fidelity's cash reserves prospectus points out that as of May 31st, it had increased its MBS backing to 26% of the portfolio from 19.9% as of November 30, 2006.
Many people with a vested interesting in the matter (myself included…I kid) are worried that these money market funds will turn around and bite the hedge fund community its collective ass. If significant withdrawals take place, things may turn out to be much less liquid than previously assumed, and we'll have to make the gargatuan effort to create an "uberschadenfreude" tag (it's an extremely painful process that I'd be happy to never go through again, but sometimes you just need a "It's as Ann as the nose on Plain's face" tag to make it through the day).

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