I've read a lot of dramatic predictions in terms of hedge fund redemptions that will result from this scandal... Had an interesting thought, though. A crapload of funds have had shitty performance ... Anyone who is unhappy and lacking trust and in those funds will likely have already bailed. If you see -40% on the year, you are at least likely to already trust the integrity of what you are being told. After all, why would -40-50%+ be a lie? I am thinking perhaps funds with 'unusual' great performance and 'block box' character to match will get pressure on redemptions. Those funds are likely to have profited from recent trends, I imagine, and are not holding too much of what has been beat up lately. With that said, we may get unwinding of recent trend trades that have worked. (long treasuries, long dollar, short commodity, short stock, etc) Counterintuitive, but I imagine the weak hands are already shaken out of the hedge fund clientel.. Any further shaking should be a nail in the coffin, but those redemptions won't necessarily result in what everyone expects (selling of long stock and bond portfolios). Hell could you imagine what would happen if levered CDS protection buyers were forced to neutralize their positions? Bonds in all classes could skyrocket. I'm sure those funds betting on wide spreads have done well as of recent, and might be under scrutiny. In the end, no one knows the results. How much long equity exposure exists in the hedge fund universe as a percentage of total assets is an unknown, so it is impossible to ascertain conclusions. Also: if people take money into their own hands as result of this lack of trust, why are they not necessarily buying stock, ETF, and bonds themselves? That money doesn't stay in cash necessarily forever, and people who are invested hedge funds generally realize they were there because cash as an asset offers no protection in inflationary times. And despite one side of media, there's a large consensus of investor that still buys the inflation story as correlated to recent monetary supply changes from world central banks. That leaves the alternatives: assets, just not parked under a rip-off hedge fund billing structure.
This of course is just a rough estimate, however (in)accurate. It's impossible to know the exact net global long exposure.
Interesting ... Poor avg hedge fund returns for 08 considering they are net short most of the year? If this data is correct, then I assume fixed income asset losses, commodity losses, and currency losses dwarf net equity shorting gains for the hedge fund universe then.
Don't worry. Everything will be fine. source: http://www.nytimes.com/2008/12/13/business/13investors.html?_r=1&th=&adxnnl=1&em c=th&adxnnlx=1229184037-2ejiWfj8UNbzAnYKtfz20Q&pagewanted=all Investors in the lobby of Bernard L. Madoff Investment Securities in Manhattan. By DIANA B. HENRIQUES and ALEX BERENSON Published: December 12, 2008 The zoning lawyer in Miami trusted him because his father had dealt profitably with him for decades. The officers of a little charity in Massachusetts respected him and relied on his advice. Skip to next paragraph Related Now Accused of Fraud, Wall St. Wizard Had His Skeptics (December 13, 2008) Standing Accused: A Pillar of Finance and Charity (December 13, 2008) Hedge Funds Are Victims, Raising Further Questions (December 13, 2008) Times Topics: Bernard L. MadoffWealthy men like J. Ezra Merkin, the chairman of GMAC; Fred Wilpon, the principal owner of the New York Mets; and Norman Braman, who owned the Philadelphia Eagles, simply appreciated the steady returns he produced, regardless of market conditions. But these clients of Bernard L. Madoff had this in common: They chose him to oversee much of their personal wealth. And now, they fear, they have lost it. While Mr. Madoff is facing federal criminal charges, accused by federal prosecutors of operating a vast $50 billion Ponzi scheme, many of his clients are facing an abrupt reversal of fortune that is the stuff of nightmares. âThere are people who were very, very well off a few days ago who are now virtually destitute,â said Brad Friedman, a lawyer with the Milberg firm in Manhattan. âThey have nothing left but their apartments or homes â which they are going to have to sell to get money to live on.â From New York to Palm Beach, business associates of Mr. Madoff spent Friday assessing the damage, the extent of which will not be known for some time. Many invested with Mr. Madoff through other funds and may not know that their money is at risk. Emergency meetings were being held at country clubs, schools and charities to assess the potential losses on their investments and to look for options. There is not much guidance available yet from regulators. On Friday, a federal judge appointed a receiver to oversee the Madoff firmâs assets and customer accounts. A Web site is being set up to keep customers informed, but no one is sure yet whether any sort of safety net will catch the most vulnerable investors. For Stephen J. Helfman, a lawyer in Miami whose father had opened an account with Mr. Madoff more than 30 years ago, the news on Thursday came as a hammer blow. âThe name âMadoffâ has overnight gone from being revered to reviled in the Helfman family,â Mr. Helfman said on Friday. His grandmother, at 98, relied on her Madoff money to pay for round-the-clock care, he said, and his two childrenâ â¬â¢s college funds were wiped out. âThirty-six years of loyalty, through two generations, and this is what we get,â he said. The news was equally devastating for the Robert I. Lappin Charitable Foundation in Salem, Mass., which works to reverse the dilution of Jewish identity through intermarriage and assimilation by sending teenagers to Israel and supporting other Jewish education efforts. The foundation was forced on Friday to dismiss its small staff and shut down its programs to cope with its losses in the Madoff funds, according to Deborah Coltin, its executive director. âWeâve canceled everything as of today, everything,â she said tearfully. Ms. Coltin said she did not know how the little foundation came to be so exposed to the Madoff firm. Its most recent tax filings show that it had $7 million at the end of 2006, with $143,344 in stocks and the rest in âgovernment securities.â It reported the sale that year of âBernie Madoffâ securities, but did not explain what those securities were. Sam Englebardt, a media investor in Los Angeles, said several relatives had entrusted virtually all of their assets to Mr. Madoff â and he understood why. âIt seems like a huge over-allocation, I know,â Mr. Englebardt said. âBut remember, they had started out small and invested over 5 years, 15 years, 30 years â and every year they got a great return, and they could always take money out without ever having a problem.â As that track record lengthened, his relatives gradually entrusted more of their savings to Mr. Madoff, he said. âI suspect that is what has happened across the board,â he added. âPeople came to trust him so much that, eventually, they trusted him with everything.â Such stories were repeated in e-mail messages and telephone calls throughout the day on Friday. A woman in Brooklyn whose father died just weeks ago found that his entire estate and a substantial portion of her stepmotherâs money was invested with Mr. Madoff. A law school official in Massachusetts fears he has lost millions in the collapse of the Madoff operation. Some wealthy victims, of course, can afford to seek redress on their own. But for them, litigation seems the only certainty. Throughout the rumor-fueled hedge fund world on Friday, money managers were comparing notes and assessing losses. By all accounts, they run broad and deep â â¬â in the billions. Mr. Merkin, a prominent philanthropist and the founder of several hedge funds, including one called Ascot Partners, jolted his clients on Thursday with a letter announcing that âsubstantially allâ of that fundâs $1.8 billion in assets were invested with Mr. Madoff. âAs one of the largest investors in our fund, I have also suffered major losses from this catastrophe,â Mr. Merkin said in the letter. âWe have retained counsel to determine what our next steps should be.â Some of Mr. Merkinâs investors have also âretained counsel.â Harry Susman, a lawyer in the Houston office of Susman Godfrey, said he was talking with several clients about legal options. âThese investors were never aware that all of their money was invested with Madoff,â Mr. Susman said. âThey are obviously shocked.â Sterling Equities and the Wilpon family acknowledged on Friday that they had money at risk in the Madoff scandal. âWe are shocked by recent events and, like all investors, will continue to monitor the situation,â said Richard C. Auletta, a spokesman for Sterling and the Wilpons. The Mets organization issued a statement saying that the scandal would not derail its new Citi Field stadium project in Queens or âaffect the day-to-day operations and long-term plans of the Mets organization.â A lawyer for Norman Braman of Miami, a wealthy retired retailer and the former owner of the Philadelphia Eagles football team, confirmed that Mr. Braman, too, had money locked up and perhaps lost in the Madoff mess. And Bramdean Alternatives, a London asset manager run by Nicola Horlick, saw its share price plummet nearly 36 percent on Friday after it announced that nearly 10 percent of its holdings were caught in the Madoff scandal. Mr. Madoff has resigned from his positions at Yeshiva University, where he was treasurer for the universityâs board and deeply involved in the business school. âOur lawyers and accountants are investigating all aspects of his relationship to Yeshiva University,â said Hedy Shulman, a spokeswoman for the university. The most recent tax filings for the university show that its endowment fund, a separate charity, was heavily invested in hedge funds and other nontraditional alternatives at the end of its fiscal year in 2006. The school paper, the Yeshiva Commentator, recently reported that its endowmentâ â¬â¢s value had dropped to $1.4 billion from $1.8 billion â before the scandal broke. Reporting was contributed by Stephanie Strom, Julie Creswell, Eric Konigsberg, Zachery Kouwe and Charles Bagli.
A zillion hedge funds a zillion different strategies. The vast majority of previous solid performers were in de facto short premium trades like carry trades or option writing. One of the points seldom if ever picked up by the financial press is that the "leverage" on these positions wasn't just naked but spreads. IOW's LEH wasn't using 40-1 to get naked long toxic. They were long 6% toxic financed with 4% borrowings. That trade produced 2% unleveraged. Kick it up 20x and now it produces 40%. As long as the toxic pays back principal at maturity then bad marks are just something to add into. Until of course there's actual principal risk. Then you're done. At heart these swaps vs. Treasuries (or even lower yielding toxic) were no different than yen carry trades etc. The yield trade exactly resembles a short put on the spread with the carry being akin to collecting premium.
So bottom line, how do you think this goes down? Do you think investors are going to panic sell all funds because they don't trust anyone anymore? Mutual funds, hedge funds, etc.. out the window ? Save under the mattress and buy gold? Honest thoughts...
Without a doubt, and it is like a domino chain, one investigation leads to another and then another. We will be seeing fraud prosecuted in the next year that will make the Enron MCI era seem positively rife with honesty.
Is anyone else enjoying reading about this as much as I am? All those "wealthy" good folk who thought they were "it" with all their money. This will be a truly enjoyable christmas.
No, I don't enjoy reading about it and I don't enjoy the us vs. them mentality that is developing. Yes, some of these people are probably arrogant assholes. But, some of them probably just worked really hard or got lucky and had a lot of money. Those of them that are philanthropists are probably just sick to death. If you are responsible enough of a person to really feel like you should try to make a difference in the world, I can't imagine the devastation you must feel over the irresponsible act of losing a huge amount of money.