Reply #31: The funds didn't actually own the houses itself. The "property" for them was CDO bonds [View All]

[Zynx]

As far as what happened to the hedge fund assets - they're literally obliterated between the markdown in what the CDO's were worth and creditors demanding money back that is significantly in excess of the original investments made in the funds, due to the funds taking out very high debt ratios.

If you put in $10,000,000 and the fund borrows $60,000,000 for a total fund value of $70,000,000 and it goes down to $55,000,000 and the creditors want their money back, there's only $55,000,000 in the fund, and the debt holders get paid first, not the equity guys (you) and not in a % of what the contribution was either. So you are never going to see your $10,000,000 again. Hence, zero value.

That's how hedge funds blow up. They don't drop to zero, it's just entirely due to their debt structures being unable to absorb big hits followed by their creditors wanting their money back. If they didn't borrow money, they'd be much less vulnerable.

A hedge fund doesn't need to borrow money, by the way. They're totally unregulated, so they can be anything. It's just that almost all of them do borrow money to magnify the dollar value of returns.