Hedge Fund Collapse

Hedge Fund Tequesta Collapses

Fortune examines "The Death of a Hedge Fund", specifically the Tequesta Mortgage Hedge Fund.

Tequesta's story is similar to other, larger hedge funds that have imploded recently when they were unable to satisfy brokers' demands for more collateral. However, Tequesta is unique for its effort to avoid the credit risk that befell other funds. Despite this fact, Tequesta collapsed when its prime broker, Citigroup, decided to pull its credit.

Tequesta is remarkable because it was performing relatively well, achieving a steady influx of returns to its investors. The hedge fund was cautious in trading prime jumbo mortgage funds with low levels of default. Tequesta would have continued its success, had it not been for the unexpected stall in the market for triple-A rated bonds. This evaporation of the market led to a fall in value for jumbo mortgage funds and to make matters worse for Tequesta, its primary brokers were forced by the credit crisis to demand more collateral. The mortgage hedge fund shut down, primarily forced by Citigroup's desperate margin call demanding collateral that Tequesta simply did not have.

Tequesta's fall shows that even hedge funds with strong returns are not invincible to the credit market's decline; or, as Roddy Boyd puts it, "the wolf can be right outside the front door."

- Richard

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