Big banks learn K1 hedge fund returns were unbelievable
Who could lose money on performance like this?
This just in: Barclays, JPMorgan and BNP Paribas are swallowing $400 million in losses after making loans to German-based hedge fund firm K1 Group– now under criminal investigation, Bloomberg reports.
The returns were unbelievable: The K1 Global Fund claims to have steadily risen more than 900% since 1996. The Dow Jones Industrial Average gained about 90% in that same time frame. But the banks apparently weren’t concerned about K1 which invested in a variety of hedge funds. Here’s possibly one reason, according to an expert quoted by Bloomberg:
Lending to firms that invest in a variety of hedge funds is considered safer because risks are spread among a variety of managers, said Michael Statz, founder of Fiducia Capital in Munich, a hedge-fund consultant. Banks typically use the fund stakes as collateral. If one of those funds loses money, banks can force the sale of other stakes to avoid losses on their own books.
Why does this sound so familiar?
Graphic via FT Alphaville blog
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Ms. Miller,
So the “exceptional” leadership of these giant financial firms, the ones paying tens of millions of dollars a year for the “special” skills of their leaders, were taken in by a Ponzi scheme (again). The bigger problem is that the entire US economy is becoming a giant shell game. Finance, Insurance, and Real Estate (FIRE) are really the main economic activity in this country. With no real physical product to produce, at the end of the day all they make is paperwork, it is easy to shuffle the paper a bit more and with some sleight of hand, voilà, the profits just role on in. The sad part is that the Obama administration is still allowing, or even encouraging this sort of scamming, seeing, I suppose, that there is actually no other way to make a profit on Wall Street.