This just in: Barclays, JPMorgan and BNP Paribas are swallowing $400 million in losses after making loans to German-based hedge fund firm K1 Group– now under criminal investigation, Bloomberg reports.
The returns were unbelievable: The K1 Global Fund claims to have steadily risen more than 900% since 1996. The Dow Jones Industrial Average gained about 90% in that same time frame. But the banks apparently weren’t concerned about K1 which invested in a variety of hedge funds. Here’s possibly one reason, according to an expert quoted by Bloomberg:
Lending to firms that invest in a variety of hedge funds is considered safer because risks are spread among a variety of managers, said Michael Statz, founder of Fiducia Capital in Munich, a hedge-fund consultant. Banks typically use the fund stakes as collateral. If one of those funds loses money, banks can force the sale of other stakes to avoid losses on their own books.
Why does this sound so familiar?