Hedge Fund Face Margin Calls on Frozen Assets

There are some connections between the collapse of Lehman Brothers and shrinking hedge fudn industry.

Lehman’s London-based prime brokerage has about 3,500 active clients including hedge funds that own about $45 billion in securities. They hold an additional $20 billion in short positions. After the bankruptcy, investors are 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.

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. Some hedge funds reluctantly close in part because of their assets stuck with Lehman.

Some managers are looking at funds that will have to shut down, but they can't even shut down because they don't know what they have left. The thing is they cannot now even liquidate the fund. They always urged PwC to work fast to unlock assets. PwC has told some clients they can get their securities back early provided they agree to return them at a later date if other creditors have claims on the same assets.

Until now, Lehman’s hedge fund clients are stuck in limbo.