Desperate companies turn to 'usurious' hedge funds

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Smaller companies on the junior Alternative Investment Market (AIM) are being forced to borrow cash from hedge funds at "usury rates" in order to survive, Square Mile insiders have warned.

Some cash-rich fund managers are avoiding volatile equity and bond markets and instead lending to AIM firms, lured in by the prospect of earning giant fees.

"The kinds of costs involved in borrowing from some of these guys are huge," said one city chief executive. "But they have no alternative in many cases because traditional bank lending has dried up. It's like you or me being desperate enough to go and borrow from the local thug with a baseball bat."

The practice is thought to have crept in over the past few months as companies have suffered at the hands of the credit crunch during the summer.

A City stockbroker said: "We had a company that had no choice but to go to one of these. We were flabbergasted at the kind of rates involved.

"And it wasn't just the rates. Every six months, further arrangement fees kick in."

The source added: "Of course the risks of lending are now much higher, but not as high as some of these are charging. We are thinking of setting up our own lending arm and undercutting some of these guys. It's not what we do at the moment, but if this bear continues for another year it could be something for us to do next year."