The question these funds will be asking is: why should a leveraged investor borrow money at over 5.25 per cent to invest in an asset (Indian market) that’s sub-5 per cent? The answer can be given only by those investors, but when the money is borrowed, it’s not answers lenders look for but returns or at least returns-free capital. This repricing began over the past two years when the FED raised interest rates to control liquidity and other central banks followed. Repricing was possible, ROR was calculable.

It worked like this. When borrowed funds entered asset markets like real estate or equities, the risk these funds carried was significantly higher than that of a long term investor. That’s because every day, the interest meter was running. Which was fine as long as the markets were rising. But at first sign of trouble, short term volatility often meant losses for these funds. They could not afford to hold on to equity assets when they fluctuated downward by 2-6 per cent a day. To long term investors such a fall is an opportunity to buy; for short term investors it is time to sell. The maths for the two investors is not only different but often in the inverse.

Mission impossible

But how do you calculate the extent of damage you don’t know, can’t know? We are in the realm of uncertainty, says Roubini, where not only do we not know the extent of subprime losses, but equally about its impact: “The current market panic has to do with unpriceable uncertainty rather than measurable risk.” This uncertainty is impacting the financial sector, one sub-sector at a time — hedge funds, banks, asset managers. The uncertainty is about geography as well, one country at a time — beginning with US, then France, Germany, UK, Asia... every day a new landmass. Show me a person who can price that.

... contd.