Thursday, October 16, 2008

Hedge Funds Suffer From Losses, Redemptions, Lack of Humility

US hedge funds suffered $43 billion of withdrawals from investors in September.  Seriously?  Only $43 billion?  I would've guessed much more, given how lousy hedge fund returns have been.  Since investors have to give their hedge funds some notice before they pull their money out, September's redemptions are probably not an accurate reflection of how many investors will be stampeding for the exits before the end of the year.  Some industry insiders are expecting hedge fund assets to shrink by around 50% in the coming months, with some of the decline coming from lousy investments and the balance from redemptions.  No doubt much of the volatility in the markets is due to hedge funds liquidating to meet anticipated investor redemptions, in addition to forced liquidations.
Bloomberg is reporting that Highland Capital Management, a hedge fund with roughly $33 billion under management, will unwind its Crusader and Credit Strategies Funds.  According to the letter sent to investors informing them of the funds' unwinding, the funds suffered from "unprecedented market volatility and disruption."  It's funny that the folks at Highland seem to actually believe that they were somehow the victims of market volatility that they should not have been expected to foresee or manage.  I suggest that Highland's investors were the victims of lousy investment decisions and poor risk management and deserve an apology from their hedge fund managers instead of a letter filled with excuses.  After all, had Highland put on the exact opposite of their trades, the funds would have returned 30% to investors, rather than losing 30%.  I am fairly certain that in that situation Highland would not have issued a letter claiming that their magical outperformance was due to unprecedented market volatility.  No.  They probably would have said it was due to superior investing talent and skill and hiked all of their fees.  I will never understand how fund managers can possibly think that they were not responsible for losses because markets behaved in unpredictable ways.  Why is it so hard for these jokers to just apologize?  Something like this might be nice: "We're so sorry for losing your money.  We had no idea that this credit gravy train was going to come to such a screeching halt.  Due to the enormous losses we have taken this year, my fellow portfolio managers and I will gladly refund any fees we have collected from you on profits from prior years that have now been wiped out until you are made whole."  If you've been getting paid 2 and 20, you owe it to your investors to at least feel bad about losing their money and not send lame letters offering excuses for your poor investing judgement.  If you're a hedge fund manager and you don't know how to apologize, please view the following video for instructions:   


tb said...

Their shameless incredulity at their own incompetence is a joy to behold.

Thanks for the giggle.

Bob Gween said...

Who is John Galt ?? Is someone on the inside is deliberately trying to crash the system and start over with something better?