On the same day news emerged that yet another Australian hedge fund had been hit by the crisis in US sub-prime lending Standard & Poor's (S&P) has warned on the risks of too much leverage.
The ratings agency released its latest asset allocation report yesterday and urged caution in the light of the recent hedge fund blow-ups.
The report said that in the case of Bear Stearns' highly leveraged sub-prime portfolios a relatively large widening of sub-prime credit spreads meant that almost half the value of the portfolio was suddenly at risk.
"Standard & Poor's latest asset allocation report examines how increasing levels of leverage have driven the rise in asset prices, while at the same time increasing the level of risk for investors," the ratings agency said.
Hedge fund Absolute Capital became the second high profile Australian fund after Basis Capital to admit exposure to sub-prime lending. It has temporarily suspended its Yield Strategies Funds
S&P director of investment consulting Simon Ibbetson said that greater leverage meant greater risk.
"In that sense investors, fund managers, lenders, and company directors alike will hopefully have seen the rapid sequence of events at Bear Stearns or certain Australian property developers as cautionary tales."
The head of the Australian chapter of the Alternative Investment Management Association Kim Ivey, however, recently hit back at suggestions hedge funds were linked to the collapse of certain Australian property companies.
He said media commentary linking the collapse of Australian property companies with the hedge fund industry was incorrect and highly misleading.
"We would consider none of the failed property companies as a hedge fund manager. These property investment companies are not part of the hedge fund industry and their problems are specifically related to the property industry."
