JP Morgan warns hedge funds to expect intraday margin calls - Risk.net (2024)

FAQs

What triggers a margin call for hedge funds? ›

Margin calls can occur at any time, but are more likely to happen during periods of high market volatility. Here's what triggers a margin call: A security you hold declines and takes the value of your margin account below the required maintenance margin.

FINRA rules supplement the requirements of Reg T by placing "maintenance" margin requirements on customer margin accounts. As a general matter, a customer's equity in a margin account must not fall below 25 percent of the current market value of the long securities (those that are fully paid for) in the account.

To recap, a margin call is a risk associated with margin trading, or trading with borrowed money. If your account balance falls below your broker's margin requirement, your broker may ask you for additional collateral — which could mean selling your investments, or even liquidating your entire account.

A margin call occurs if your account falls below the maintenance margin amount. A margin call is a demand from your brokerage for you to add money to your account or close out positions to bring your account back to the required level.

What happens if you don't meet a margin call? Your brokerage firm may close out positions in your portfolio and isn't required to consult you first. That could mean locking in losses and still having to repay the money you borrowed.

You can do this by depositing cash or marginable securities to your account or by liquidating existing positions to generate cash. One of the most important things to understand about margin calls is that your brokerage firm has discretion as to when you are required to increase the equity in your margin account.

"The best way to describe a margin call is that you owe your investment platform or brokerage money," says Robert Farrington, founder of The College Investor.

You can think of it as funds you borrow for trading, and you must square off positions by the end of the trading day. This intraday margin lets you buy and sell more shares and capitalise on the rising prices. While leverage can significantly amplify your gains, you also risk incurring heavy losses.

Understand How Margin Works

For example, let's say the stock you bought for $50 falls to $15. If you fully paid for the stock, you would lose 70 percent of your money. However, if you bought on margin, you would lose more than 100 percent of your money.

The CEO's name, John Tuld, rhymes with the name of the ex-CEO of the now-defunct investment bank Lehman Brothers, Richard S. Fuld. Lehman Brothers, like the firm in this film, found themselves catastrophically over-leveraged in mortgage-backed securities in the financial crisis of 2008.

How did margin call cause the stock market crash? ›

The evidence suggests that a tightening of margin requirements in the first nine months of 1929 combined with price declines in September and early October caused enough investors to become constrained that the market was tipped into instability, triggering the sudden crash of October and November.

Margin trading is risky since the margin loan needs to be repaid to the broker regardless of whether the investment has a gain or loss. Buying on margin can magnify gains, but leverage can also exacerbate losses.

So, if you wanted to buy a stock for $100, you could put $50 of your own money in and borrow $50 from your broker. Keep in mind, though, that interest will immediately start accruing on your loan. But, if your stock falls to $40 in price, you'll still owe $50 to your broker.

If you can't repay money owed in a margin account and the company sends or sells the debt to collections, that could be reported and hurt your credit. However, what generally happens is that the company monitors how much you owe and your overall account balance.

Hedge funds are more likely to have frequent margin calls than other types of buy side firms. The frequency of margin calls is correlated to size, with large funds much more likely to have daily margin calls.

A margin call is when a brokerage firm demands that an investor add cash or equity into their margin account because it has dipped below the required amount. The margin call usually follows a loss in the value of investments bought with borrowed money from a brokerage, known as margin debt.

John Tuld : There are three ways to make a living in this business: be first, be smarter, or cheat. John Tuld : Maybe you could tell me what is going on. And please, speak as you might to a young child. Or a golden retriever.

Hedge funds use several forms of leverage to chase large returns. They purchase securities on margin, meaning they leverage a broker's money to make larger investments. They invest using credit lines and hope their returns outpace the interest.