Thursday 16 October 2008

Hedge Fund Managers Admit Errors

Many now adopt conservative stand to preserve capital, meet redemptions
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  1. Hedge Fund Managers Admit Errors

    Many now adopt conservative stand to preserve capital, meet redemptions

    Bloomberg
    15 October 2008

    (NEW YORK) Hedge fund managers, after enduring the industry’s worst month in a decade, are seeking to explain to investors what went wrong and what they are doing about it.

    ‘We clearly underestimated several things, most importantly the tsunami of redemptions that are being delivered to hedge funds as investors line up to get out of these funds, as well as record outflows from equity mutual funds,’ Jeffrey Gendell, who runs Greenwich, Connecticut-based Tontine Associates LLC, said in an Oct 1 letter to clients.

    ‘I am not a nervous person by nature, but should have been under the circumstances,’ said Mr. Gendell, whose Tontine Partners LP fund plunged 59 per cent last month, leaving it down 67 per cent for the year. Mr. Gendell, 49, had expected shares of steel, engineering, airline and chemical companies to appreciate because of falling oil prices. Instead, they plummeted.

    Hedge funds, which endeavour to make money whether markets rise or fall, lost an average of 4.7 per cent last month, the biggest monthly decline since August 1998, according to data compiled by Hedge Fund Research Inc.

    Funds fell 17 per cent this year through last Thursday, compared with a 38 per cent decline by the MSCI World Index of stocks. It was the worst performance by the lightly regulated private pools of capital since the Chicago- based firm began collecting data.

    Almost a third of hedge funds may close in the next two years, according to a Sept 29 report by analysts at Credit Suisse Group AG. There were about 3,100 hedge funds that managed a combined US$1.9 trillion as at June 30, according to Hedge Fund Research. This year’s investment losses mean that many funds would not be able to collect performance fees, usually at 20 per cent of gains, while management fees, usually at 2 per cent of assets, will shrink.

    Managers have been selling assets, both to raise cash for what they expect to be a surge in year-end redemption requests, and to preserve capital as market volatility has risen to record levels. The Standard & Poor’s 500 Index on Monday rebounded from its worst week in 75 years with an 11.6 per cent advance.

    David Slager, manager of the Atticus European Fund, told investors that more than 50 per cent of his fund is now in cash or US Treasuries after he lost 43.5 per cent so far this year.

    ‘I believe it is prudent to maintain our critical focus on capital preservation and liquidity,’ he said in a letter sent on Oct 1.

    Mr. Slager told investors that his holdings are now skewed towards stocks that will fall, while in July, his bets were mostly bullish because he had anticipated only a mild economic slowdown in the US.

    ‘While in hindsight, I wish I had made the decision to sell sooner, I am glad that it is now done,’ he said. He added that he would start buying again only after a ‘climactic selloff’ or when he deems that credit markets have stabilised.

    David Einhorn, who runs Greenlight Capital LLC, said that external forces were partly to blame for the 17 per cent drop in his three funds last month.

    While he and his team made mistakes, ‘we believe that our portfolio management has been reasonable’, he said in an Oct 1 letter to clients.

    He pointed to the US Securities and Exchange Commission’s Sept 18 ban on short sales of financial stocks for some of the losses in the month. The ban, which expired last Thursday, eventually included about 15 per cent of the companies in the Standard & Poor’s 500 Index.

    After the ban went into place, the shorts recovered much more than the longs, he said, ‘especially the financial shorts abundant in our portfolio’.

    Mr. Einhorn said that he planned to hold on to the short positions in financial companies ‘for a good deal of time (providing there aren’t additional extraordinary legal changes) until they begin to trade in a normal market environment again’.

    In the third quarter, his three funds lost about 15 per cent, one percentage point of which came from stocks that he had shorted. He told investors that his funds are more conservatively invested than ever. While almost three-quarters of assets, including leverage, are long, he has offset those holdings with short sales that take the net to 9 per cent.

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