Hedge Fund Hari-Kari

We have warned you about the debt and derivatives-driven frenzy in hedge funds and private equity firms for quite awhile. Using dirt-cheap financing, and astronomical leverage, these secretive funds have lit the fuse on a ticking time-bomb in global financial markets.
So long as global rates stay low, and liquidity remains abundant, there's no reason to worry -- or so the story goes. But lately we've seen some fraying at the edges of the global liquidity glut, as this story points out, and it may be only the tip of the iceberg.
These two hedge funds got into a jam when the ongoing housing-sector bear market clipped the value of "complex securities backed by subprime mortgages". These are essentially highly leveraged derivatives tied to shaky home loans, which are rapidly going bad.
These exotic investments like most derivatives probably looked great on paper, but the trouble is, they sometimes trade infrequently if at all. And that means it's hard to unload or "unwind" these leveraged derivatives bets in a hurry -- much less obtain an accurate market value for your positions.
But still the hedge fund and private equity crowd continues to play the game with reckless abandon. According to the article, funds borrowed on margin hit a record $318 billion in May on the New York Stock Exchange. However, "the risk is that recently placid markets start to crack, turning these profitable leveraged bets into deepening losses."
Attentive investors should keep a close eye on these leveraged financial shenanigans this summer.