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New York Fed’s Repo Loans Are Foaming the Hedge Fund Runways

Courtesy of Pam Martens

Mark Carney, Head of the Bank of England

Mark Carney, Bank of England Governor

There is growing evidence that the New York Fed, the Wall Street feeding tube team of the Federal Reserve Board of Governors, is using its massive new repo loan operations to securities firms (primary dealers) to foam the Wall Street runways to try to avoid a crash landing as money gushes out of hedge funds by the tens of billions of dollars.

According to a report at eVestment, investors pulled $29.37 billion from hedge funds in the third quarter of this year, bringing the total year-to-date to an eyebrow-raising $76.86 billion. That’s more than twice the amount that was withdrawn in all of last year. Hedge funds are highly-leveraged, so $76.86 billion in withdrawals could translate into hundreds of billions of dollars of liquidations in stock and bond markets. The report further notes that this is the “sixth consecutive quarterly outflow.”

Supporting the thesis that a surge in hedge fund withdrawals at least partly explains the liquidity crisis on Wall Street that has prompted the Fed to restore its money funnel, the Financial Times reported on October 1 that the CFO of a “top-10 US bank” told it that “We have plenty of liquidity. We are just choosing not to lend it out overnight to hedge funds.”

What may be weighing on bank fears about hedge funds and mutual funds holding illiquid assets are several high-profile flameouts over the past year.

On June 3 the highly-touted $4.7 billion Woodford Equity Income Fund in the U.K. froze withdrawals by investors. The fund was slated to reopen for withdrawals in December but now the U.K. regulator, the Financial Conduct Authority (FCA), is reporting that the fund will not reopen and will be liquidated instead. Investors will receive their pro-rata share of the liquidations in installments – with no firm timeline given. The FCA has an ongoing investigation into the matter. The problem, according to the FCA, is that the fund was holding illiquid and hard to price assets.

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