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Hedge Funds To Pounce on US Debt

In a move that is either predatory or opportunistic, The New York Times reports "hedge funds are stockpiling cash so they can buy up United States debt if other investors flee."

Just two years after Washington DC politicians castigated traders for causing the credit collapse of 2008, now Wall Street is tsk-tsking over the debt ceiling showdown between the White House and the GOP. As today's smart piece by Louise Story and Julie Creswell amply shows, Wall Street is preparing for a possible crisis if the US' debt rating should be downgraded.

And hedge funds are looking to make a killing:

In New York, the hedge fund KLS Diversified Asset Management has been accumulating cash to take advantage of profit-making opportunities if, for instance, investors are forced to sell cheaply because of a decline in the nation's credit rating.

KLS was founded in the summer of 2008, and it weathered that storm in part by having lots of cash on hand, though back then it also was able to consider its Treasury holdings to be nearly as safe as cash. In the case of a United States default, KLS says it believes it can make money if investors flee the market, said Harry Lengsfield, a managing partner of the firm.

In his view, a default is unlikely but it should not be a surprise if one occurs. "It's hard to argue that this case hasn't been telegraphed and people haven't been warned and warned again," he said.

One of the worst possibilities that people in the financial industry, like Mr. Lengsfield, have been discussing is that scores of insurance companies, pension funds and mutual funds might be forced to dump their Treasury holdings. Some investors have rules that they cannot hold assets that are rated below AAA. It was this sort of rule that drove the forced selling of mortgage bonds during the financial crisis.

Let's hope that the pols in DC can hear this above the roar of the air conditioning.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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