Investment Markets » Banking and Finance
The Collapse Of Peloton
Does the implosion of one of the City's leading hedge funds mark the beginning of the end of the crunch?
Until recently, former Goldman Sachs banker Ron Beller's main claim to fame outside the city was as the victim of a "super thief" secretary Joyti De-Laurey, who was convicted of fleecing him of £1.1m in 2004. Yet Beller went on to bigger and better things.
After setting up Peloton Partners with a former Goldman colleague in 2005, he became a feted hedge-fund player – not least for his early call of the sub prime crisis, which saw Peloton's ABS Fund return its delighted investors 87% last year.
Hence the consternation surrounding the fund's sudden collapse when investment bank creditors, including Goldman Sachs, demanded their money back, forcing the fund into a fire-sale of its assets, which wiped out some $2bn in equity.
Creative destruction is a fact of hedge-fund life, but even so, the implosion of a fund that bet against sub prime mortgages is disturbing. Peloton ABS rejected the dross and backed the high-quality end of the mortgage market. If it is the proverbial canary in the coalmine for a widening of the credit crisis, then we should all start to worry.
Followers of the Tour de France will recognise the company name. A peloton is a pack of cyclists who stick tightly together to reduce wind resistance. In this instance, the collapse of one apparently creditworthy fund could trigger a spate of further crashes. Hitherto, the banks have kept the lending lines open to hedge funds; now it appears they have changed position. Indeed, fears of a hedge-fund meltdown are rippling through the City, with dozens more funds said to be close to following Peloton into collapse.
Optimists believe that Peloton marks the darkness before the dawn; others say there's plenty more to come. In truth, we do not know. What is clear is that the situation could yet get a good deal worse. So far, the financial crisis has hit credit markets hard, but has yet to really hurt stock markets, which have sailed on relatively unconcerned. But if this cycle continues, and banks become even more stuffed with bad credit, the forced selling might spread beyond the credit markets and into equities.
This financial crisis is now entering into its most dangerous phase: a period of distressed sellers, dumped holdings and fire-sales that will further damage the balance sheets of banks and may well precipitate a recession. There is one small comfort. The period of forced selling, however long it may last, is the final stage of the crisis, the climactic event that brings it to an end.
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