Hedge Industry - Bye Bye?

Discussion in 'Wall St. News' started by ShoeshineBoy, Oct 6, 2008.

  1. Is the hedge fund industry going the way of Wall Street?

    Who is going to keep their money in a fund with significantly greater risk levels during this crisis?


    October 05, 2008
    The Next Moment of Truth
    The lightly-regulated hedge fund sector is known for its lack of transparency and liberal use of borrowed money. Given that, most people would naturally have assumed that these operators would be at the forefront of the kind of epic financial disaster that has unfolded over the past year or so.

    Yet up until recently, that has not been the case. In fact, despite some notable failures and hiccups -- including the meltdown of Amaranth Advisors two years ago and upheavals among the "quant" funds in August 2007 -- hedgies have not really taken center stage in the current crisis (except, perhaps, for those who managed to bet correctly on which banks, brokers and insurers would suffer the most for their prior sins).

    Still, given how contagious the crisis has been since since it first began -- you know, back when people like the Fed Chairman were reassuring everyone that problems in the subprime sector would remain "contained" -- there was never really any question about whether many of these Masters of the Universe would eventually get sucked into the vortex of the Great Unraveling and add to the chaos.

    Based on the following Financial Week report, "Hedge Funds Wilt in Credit Drought," it looks like that particular moment of truth will soon be upon us.

    Investor redemptions could cull herd of hedgies; 700 to 1,000 funds may disappear by year-end

    The hedge fund industry is poised for a massive shake-up as investors demand the return of billions of dollars from both struggling and thriving funds.

    Hedge fund investors had until Sept. 30 to notify managements that they wanted to recall their money by the end of the year. While it's not yet clear how many investors submitted redemptions, the number could be sizable given the relatively poor performance of the sector lately.

    The squeeze on hedge funds from the credit crunch is two-fold: a recent ban on shorting instituted by the Securities and Exchange Commission as a result of the crisis eliminates an important trading tactic, while the crunch itself limits their ability to use credit to add leverage.

    The industry as a whole was down 4.85% for the year at the end of August, according to a key index at Hedge Fund Research, which tracks hedge fund strategies. A wave of redemptions could lead to the largest industry culling since 2005, the last time it experienced mass redemptions.

    Struggling hedge funds could translate into more bad news for corporate America, which is already reeling from the credit crunch and dismal consumer spending, among other things. As the hedge fund industry has ballooned to $2 trillion in the last several years, it has become a vital source of capital to corporations in the form of debt and equity, said Mitchell E. Nichter, partner in the corporate practice of law firm Paul Hastings.

    “Hedge funds are just one possibility on the liquidity menu,” Mr. Nichter said. “If their capital dries up, then that's another source of capital that won't be available to corporate America.”

    For instance, a report last year from consulting firm Greenwich Associates found that hedge funds were responsible for nearly 30% of all fixed-income trading in the U.S. That market, and others, could take a hit as hedge funds shrink, said Mr. Nichter.

    Some 700 to 1,000 funds are expected to disappear this year, depending on how bad things are through December, estimates Ken Heinz, president of Hedge Fund Research. The industry shrunk by about 10%, or 850 funds, during a rough patch in 2005.

    The total scope of redemptions in 2008 won't be known until funds start reporting their assets in the coming weeks, Mr. Heinz said. A look at the first half suggests more pain ahead, though. About 350 funds closed as the industry raised $30 billion in new capital through June, down from $117 billion in new capital during the first half of 2007, according to his data.

    “We've seen an increase in the rate of liquidations,” Mr. Heinz said. He expects a flight from low-performing to high-performing funds, as recent research from his firm shows an historic performance disparity between average and top-tier firms. He also expects money to bleed from arbitrage funds, and relative-value funds, among others.

    Charles Gradante, managing principal of hedge fund adviser Hennessee Group, is even more pessimistic than Mr. Heinz when it comes to the toll the current economic woes will take on hedge funds. He said the reduction could be as high as 2,000 funds, as restrictions on short-selling and lack of leverage cut into the industry's returns.

    Given the recent failures among prime brokers, most notably Lehman Brothers, hedge funds have found it more difficult to borrow more from brokers to cover margin calls. Meanwhile, his firm has found that investors drew down about $80 billion, or 4%, of their money from the hedge fund industry in the latest quarter, the largest redemption in any quarter since his firm started tracking such data in 1987.

    Anecdotal evidence that redemptions now are ahead of even that pace started to emerge last week. In announcing an operating loss for the first half of the year, Swiss hedge fund Absolute Capital Management said last week that it expected more of its clients to withdraw their money.

    British fund manager RAB Capital last week took steps to stem redemptions from its struggling special situations fund. The firm announced that investors in the fund, which has lost more than 60% of its value since last year, agreed not to withdraw their money for three years in exchange for more favorable rates.....
  2. From today's FT:

    "What do you say to a hedge fund manager who can’t hedge? ‘Quarter pounder and fries, please.’" :(
  3. how bout, "fill it up with regular".
  4. Okay, here's the rest of the story - apparently, hedge funds are a 2 trillion dollar industry. Brrr...


    ....What happens at hedge funds, those loosely regulated private investment vehicles, matters to just about every investor in America. Hedge funds are not just for the rich anymore. Since 2002, the industry has roughly tripled in size, as pension funds, endowments and foundations piled in, hoping for market-beating returns.

    Now, the heady returns of the industry’s glory days are over, at least for now. This is shaping up to be the industry’s worst year on record, with the average fund down nearly 10 percent so far, according to Hedge Fund Research. Famous traders like Steven A. Cohen, who runs SAC Capital Advisors, are losing money, and even Kenneth C. Griffin, the head of Citadel Investment Group, is down in one of his funds.

    And they are the lucky ones. A growing number of hedge funds are closing down. About 350 were liquidated in the first half of the year. While hedge funds come and go all the time, if the trend continues, the number of closures would be up 24 percent this year from 2007.

    Many funds are bracing for trouble. The industry has set aside $600 billion in cash, according to Citigroup analysts, partly because of the uncertainty hanging over the markets but also because of possible redemptions. If redemptions do pour in, hedge funds can freeze the process by not paying investors for a certain period of time, slowing the pace of withdrawals.

    One little-known hedge fund barometer is pointing to trouble, however. The alphabet soup of complex investments that Wall Street created in recent years — R.M.B.S.’s, C.D.O.’s and the like — includes C.F.O.’s, short for collateralized fund obligations. Virtually unknown outside the industry, these investments are the hedge fund equivalent of mortgage-backed securities: securities backed by hedge funds.

    But last week, credit ratings agencies warned that they might lower the ratings of several C.F.O.’s, in part because of the concern that investors would withdraw money from the funds backing the investments. Standard & Poor’s downgraded parts of nine C.F.O. deals, Fitch placed five on a negative rating watch, and Moody’s put one on a downgrade review.

    “The concern is over the redemptions that are happening,” said Jenny Story, an analyst with Fitch Ratings. “The gates are being closed.”

    While few in number, C.F.O.’s represent a broad swath of the industry. The vehicles were created by funds of funds, which invest in hedge funds. Each C.F.O. includes stakes in dozens and sometimes hundreds of hedge funds with a variety of investment strategies.

    Coast Asset Management, a $5.6 billion fund of funds in Santa Monica, Calif., created three C.F.O.’s in the last few years. The three vehicles raised a total of $1.85 billion, according to Dealogic, and they have a seven-year lock-up on the money. It was that lock-up that appealed to David E. Smith, the firm’s chief executive, who ran into trouble borrowing in 1998, after the collapse of the giant hedge fund Long Term Capital Management.

    Coast executives said they were not particularly concerned about the C.F.O.’s, because they had not seen many hedge funds putting limits on redemptions, or “closing the gates,” as the industry calls it.

    “It’s clearly been a very tough year for investors in general,” Mr. Smith said. “But I think hedge funds have done a good job of navigating very tough markets and don’t get the type of recognition that they should.”

    Two of the C.F.O.’s put on watch or downgraded by the ratings agencies are run by two units of the British hedge fund Man Group. One is run by Glenwood Capital in Chicago, which saw its multi-strategy fund lose more than 4 percent through July, according to an investor. A spokesman for the funds declined to comment.

    Returns are not in yet for September, but hedge fund managers say this month is even worse than the summer. Some funds were hurt by new rules from the Securities and Exchange Commission on short-selling, a tactic for betting against stock prices. The commission made it more difficult to short all stocks and temporarily banned the strategy in more than 800 financial stocks. In particular, this hurt convertible-bond managers, who often buy bonds that can be converted into shares and short the underlying stocks.

    The short-selling ban lasts until Thursday evening, but it is widely expected to be extended.

    John P. Rigas, the chief executive of Sciens Capital Management, knows firsthand how difficult it can be to get money out of troubled hedge funds. He spotted problems at Amaranth Advisors a year before that fund collapsed because of wrong-way bets in the energy markets, but it took him eight months to retrieve all of his fund of funds’ investment. Mr. Rigas’ firm runs a C.F.O. that is invested in 41 hedge funds, but he said he had put more than 25 percent of his funds’ capital into cash to weather the storm.

    He predicts further liquidations in the industry.

    “How can I say that the environment is not bad?” Mr. Rigas said. “It’s difficult with hedge funds because they are very fragile. By their nature they’re fragile instruments because investors can ask for their money.”
  5. gaj


  6. way 2 many wise guys and a limited pool of dumb money.

    let those imbeciles running hedge funds do something useful like plucking Purdue chickens

    theres WAY 2 many college educated morons in the world
  7. dtan1e


    not all hedge funds mgr knows what they r doing, i personally know several that r B.S. guys
  8. What will happen to Mikey Bloomberg? I hope he is ok. I would hate to see him have to fly around in a Hawker 400, when is use to a Gulfstream 550.

    Lets all send in donations.
  9. indexer


    Where are they going to borrow money for leverage?
  10. Thats what really matters. they need the leverage to make the returns and they wont be getting it anymore. I dont care if SAC, Renaissance, Citadel etc.
    #10     Oct 6, 2008