If risk remains more expensive for lenders, leverage could continue to come down
By Michelle Celarier
Are hedge funds still on the brink of an ice age? That's what Donald Putnam, managing partner of Grail Partners, thinks. If the subprime crisis is an asteroid that hit the credit markets, as he suggests, it's the aftershocks that will cause all the trouble. "What killed the dinosaurs was the dust in the air starving the plants, which starved the herbivores, which starved the carnivores," says Putnam.
Of course, the food for most hedge funds is financing, and the question now is whether the ongoing mortgage and structured credit crisis will raise the cost of risk for lenders, eventually starving many hedge funds of leverage.
As a result, he believes "the constraint in hedge fund performance over the next couple of years is not going to be the ability to find assets, but...