Lehman causes more problems for hedge funds

Hedge funds, with frozen assets at Lehman, now face margin calls on the same. From Bloomberg:

Oct. 15 (Bloomberg) -- Lehman Brothers Holdings Inc.'s hedge-fund clients may have to pay more collateral on $65 billion of assets frozen when the investment bank went bankrupt a month ago.

Lehman's London-based prime brokerage has about 3,500 active clients including hedge funds that own about $45 billion in securities, Steven Pearson, the partner at PricewaterhouseCoopers responsible for unraveling Lehman's U.K. operations, said in an interview. They hold an additional $20 billion in short positions, or bets that prices will fall.

While investors are largely unable to access their Lehman accounts, the value of the securities continues to fluctuate along with the markets. The clients may be required to put up more collateral if the value of those securities drops, a process known as a margin call.

``If your bank fails, you still have to pay your mortgage,'' Pearson, 43, said in an interview in Lehman's Canary Wharf office. ``Who is the holder of the risk of the securities? The hedge funds. If the value of the securities fell, they have to meet margin calls.''

Lehman's bankruptcy, the world's biggest, has rocked hedge funds that relied on the firm to provide loans, clear trades and handle administrative tasks. MKM Longboat Capital Advisors LLP will shutter its $1.5 billion Multi-Strategy fund in part because assets are stuck at Lehman. The freeze has contributed to the $1.9 trillion hedge fund industry's worst year in two decades, according to Chicago-based Hedge Fund Research Inc.

Managers with assets at Lehman include New York-based firms Amber Capital LP and Bay Harbour Management LLC, as well as RAB Capital Plc and GLG Partners Inc., both based in London. Olivant Ltd., run by ex-UBS AG President Luqman Arnold, said this month it can't access a 2.78 percent UBS stake it held through Lehman.

`Years to Unravel'

PwC has been sorting through assets to separate those Lehman held in trust on behalf of clients and those the bank held as collateral from clients that it could then loan to other investors, a practice known as rehypothecation.

``The biggest losers will be those who had the most assets rehypothecated because they're gone,'' said Pearson. ``Asset that have been rehypothecated rank together with all creditors as to when they will get money back.''

Clients with ``trust claims'' will be returned in ``due course,'' said Pearson. PwC won't return those assets until the firm is satisfied no other clients have a claim on them, he added.

``It's going to be many months and maybe beyond many months,'' he said. It could take years to unravel.''
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