Rehypothecation: Sort it out

It’s an ugly word - rehypothecation. But it’s spelling big trouble for hedge funds. Many used Lehman Brothers as a prime broker and are now fighting to recover $40bn of collateral posted with the firm. The main cause of the mess is unclear segregation of funds. But sorting it out spells the end of cheap leverage. Prime brokerage was one of the most lucrative investment bank activities. The bank lent money to hedge funds in return for collateral, usually securities. The kicker for the bank was...