Banks quick to yank hedge funds' credit: Buchan

NEW YORK (Reuters) - Facing huge credit problems of their own, banks are increasingly yanking credit from hedge funds' trading operations at the slightest hint of trouble, the head of one large hedge fund investment firm said on Tuesday.

The trend, which has been developing since the credit market took a dive last year, could send more hedge funds into abrupt liquidation, according to Jane Buchan, chief executive of Pacific Alternative Asset Management, a $10 billion fund that invests in 65 hedge fund as a fund-of-fund.

"If there is a rumor, (the banks) pull the line of credit," Buchan said at the Reuters Hedge Funds and Private Equity Summit in New York. "You want to be the first one to cut the credit lines, not the last one."

Hedge funds rely on bank's prime brokerage divisions for trading execution, stock lending and credit to leverage trades. In recent years, hedge funds have grown to become among the most lucrative customers for many banks.

Prior to the credit crisis, when a hedge fund suffered a significant performance decline, such as a 10 percent decline, their prime broker might have been forgiving. Now that's all changed, particularly for hedge funds that trade fixed income, which often have to amplify trades with large amounts of debt to make any profit.

One recent example is Peloton Partners, the $3 billion London hedge fund manager that was forced to liquidate last month when its banks yanked its credit as its fixed income asset values declined, even though the fund said the assets were fundamentally sound.

Buchan said PAAMCO hasn't faced any similar problems with its own hedge fund investments, although it stands ready to put money into one fixed income fund if banks threaten to pull credit.

Buchan didn't identify the fund, but said Wall Street banks know that if they pull credit from that hedge fund that PAAMCO will encourage other funds in its portfolio not to trade with that bank, which could have an impact on their prime broker businesses.

(For a summit blog: summitnotebook.reuters.com/)

(Reporting by Dane Hamilton, editing by Phil Berlowitz)