Because hedge funds are unregulated, managers are free to sell short, use leverage, and invest in illiquid securities--activities not open to mutual-fund managers.
Whether you're talking about illiquid securities or affirmative action, in my experience there's plenty of room for those with alternative agendas to fudge their investment returns to justify their actions.
And attempts by Merrill Lynch, one of the prime brokers to the Bear Stearns funds, to sell some of their assets showed how illiquid the market for such securities had become.
Some of that collateral, now mostly asset-backed securities, is so illiquid that it has yet to be unwound.
In my investigative work I have found that the performance of these investments, which consist of illiquid, hard-to-value securities, is far less stellar than marketers would have you believe.
As a result, they were able to buy and sell securities that would normally be too illiquid to trade.
As well as being coaxed into reducing leverage, the banks may face pressure to ditch some of their illiquid assets, such as mortgage-linked securities and private-equity stakes.
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Indeed, private equity is not the only illiquid, high-risk, private investment that has gained the attention of securities regulators since the market collapse of 2008.
The company caters to fund managers and institutional investors trading in illiquid assets like private company stock, bankruptcy claims, loans, mortgage-backed securities and collateralized debt obligations.
If these securities are now downgraded, banks could be forced to offload lots of illiquid instruments into a falling market one of the fastest ways to lose money yet devised.
In particular, the inclusion of mortgage-backed securities will be seen by some as odd, since these proved to be wholly illiquid and unsellable in the summer of 2007.
"The inclusion of mortgage-backed securities will be seen by some as odd, since these proved to be wholly illiquid and unsellable in the summer of 2007, " said BBC business editor Robert Peston.
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