GLG's Roman, NYU's Roubini Predict Hedge Fund Failures, Panic
By Tom Cahill and Alexis Xydias
Oct. 23 (Bloomberg) -- Hedge funds closures will eliminate about 30 percent of the industry, and policy makers may need to shut markets for a week or more to stem panic, according to presentations at an investor conference today in London.
``In a fairly Darwinian manner, many hedge funds will simply disappear,'' Emmanuel Roman, co-chief executive officer at GLG Partners Inc., told the Hedge 2008 conference in London. U.S. regulators will ``find a way to force regulation,'' said Roman, 45, who runs New York-based GLG with Noam Gottesman, 47. The firm was founded 13 years ago as a unit of Lehman Brothers Holdings Inc. and now manages about $24 billion in assets.
Nouriel Roubini, the New York University Professor who spoke at the same conference, said hundreds of hedge funds will fail as the crisis forces investors to dump assets. ``We've reached a situation of sheer panic,'' said Roubini, who predicted the financial crisis in 2006. ``Don't be surprised if policy makers need to close down markets for a week or two in coming days.''
Many hedge funds have resisted oversight by the U.S. Securities and Exchange Commission, even as policy makers coordinated global interest-rate cuts and bailed out banks this month to try and stem the crisis. The hedge fund industry is stumbling through its worst year in two decades and posted its biggest monthly drop for a decade in September.
``There needs to be some scapegoats, and they are going to go hunt people,'' said Roman, who didn't indicate when new U.S. regulation may take effect. Regulation is ``long overdue,'' he said. In the U.S., ``someone can graduate from college on a Friday and start a hedge fund on a Monday.''
More Difficult
Increased regulation and higher borrowing costs will make the hedge-fund business more difficult, Roman said. Still, financial markets have ``overshot,'' he said.
In some areas of financial markets, including loans, there are ``once-in-a-lifetime opportunities,'' he said. ``At some point, people will say this isn't 1929 to the power of 10.''
Roubini, a former senior adviser to the U.S. Treasury Department, forecast this Feburary a `catastrophic' financial meltdown that central bankers would fail to prevent and that would lead to the bankruptcy of large banks exposed to mortgages and a ``sharp drop'' in equities.
The comments preceded the collapse of Bear Stearns & Cos. and Lehman Brothers Holdings Inc. as well as the government seizure of Freddie Mac and Fannie Mae. The Dow Jones Industrial Average, a benchmark for American equities, has lost 37 percent this year, including its biggest daily drop in more than twenty years on Oct. 15.
He predicted earlier this month that the world's biggest economy will suffer its worst recession in 40 years.
`Worst is Ahead'
``This is the worst financial crisis in the U.S., Europe and now emerging markets that we've seen in a long time,'' Roubini said. ``Things will get much worse before they get better. I fear the worst is ahead of us.''
Developing nations' borrowing costs jumped to the highest in six years today as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the International Monetary Fund to help weather frozen money markets and a slump in commodities. Argentina risks defaulting for the second time this decade.
``There are about a dozen emerging markets that are now in severe financial trouble,'' Roubini said. ``Even a small country can have a systemic effect on the global economy,'' he added. ``There is not going to be enough IMF money to support them.''
Italian Prime Minister Silvio Berlusconi roiled international markets on Oct. 10, first saying world leaders were discussing shutting down global financial exchanges, and then saying he didn't mean it.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
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