Another Hedge Fund Goes Belly Up

February 12, 2008 | Leave a Comment

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Its official.  Sailfish Capital Partners has gone belly up.  Expect more funds to follow in the next couple of months.  We don’t like to see hedge fund blow up, but this quote in the New York Times article by Mark S. Fishman, ”a pedigreed money manager who raised billions of dollars at the height of the hedge fund boom …” might say it all:

“It’s that sad dawning when you realize the market is so much bigger than you are,” he said.

Hubris?  You tell us.

Hedge Funds Take a Beating in January

February 6, 2008 | Leave a Comment

Chicago’s Hedge Fund Research released a statement saying that January was the worst month for hedge funds since 1998 — according to their data.  While reading some of the other blog postings about this “news” I was struck not by the postings themselves, but the comments to the posts.  A number of things became apparent … first that many people have no idea what hedge funds are or how they operate, and two, many people are under the impression that hedge funds are (by definition) hedged, so they can’t understand why so many hedge funds seem to suffer during periods like this.

Ah, if only all hedge funds were hedged!  The world would be a simple and straightforward place. But seriously, times like this are productive because the weak are culled from the herd.  I wouldn’t be surprised to hear of many hedge fund managers rebounding soon.

Here is the story as the Financial Times (FT.com) covered it:

Last month was the worst for hedge funds since the August 1998 crisis that presaged the collapse of Long Term Capital Management, according to data from Chicago-based Hedge Fund Research.

The average fund tracked by the HFRX index lost more than 2 per cent in January, with event-driven funds, which include activists, the worst hit with a 3.39 per cent loss.

Equity long-short funds – which also tend to be exposed to declines in stock markets – were badly hit too.

Funds that had long positions on stock markets lost out as UK blue-chips fell 6.6 per cent and the S&P 500 fell 6 per cent during the month.

For example, the computer-driven RIEF fund from Jim Simons’ Renaissance Technologies, one of the best-respected hedge funds, was down about 4 per cent, as it is structured to be long the market.

Simon Ruddock, founding partner of Albourne Partners, the London-based hedge fund investment advisers, said funds tended to do badly when markets changed direction but quickly made back losses.

Still, some performances are likely to be galling for investors, with many funds down more than 10 per cent.

Hedge Funds + Subprime Collapse = Profits

September 4, 2007 | Leave a Comment

An interesting story from Fxtraders.eu (subscription required) … Evidently, while some hedge funds focused on mortgage backed securities have suffered losses (that have been duly noted in the press) related to the decline in the sub-prime mortgages space, many hedge funds have also been able to generate profits as a result of its decline.  Well, I must admit that I don’t mind pointing out that we told you so.  Consider what we blogged on July 19th:

So why is HFL jumping on the bandwagon with commentary on the sub-prime issue?  Well, it’s all about low hanging fruit.  As we have seen in the past with excessively oversold markets (e.g., distressed in 2002 and converts 2004 and 2005), the smart money is ready and waiting to buy at the bottom and reap years of rewards while the mainstream sits on the sidelines and licks their wounds inflicted by painful forced liquidations.  Consider this HFL’s call out to all players with experience in the sub prime sector: now is the time to start thinking about ramping up your own sub-prime vulture funds!  Whether you’re a victim of a downsized prop desk or a shuttered hedge fund, now is your chance to strike gold.

 It certainly seems that some hedgies positioned themselves well and are now benefiting from the subprime collapse …

In what has been the best short sale theme since 2002, many hedge funds have greatly benefited from the collapse in sub-prime mortgages via their short exposure to mortgage lenders and sub-prime mortgage backed securities and indices. While some have focused on shorting mortgage lenders and buying credit default swaps (CDS) on specific mortgage backed bonds, others have elected to purchase CDS on indices of these securities (the ABX series), with most focused on those securities issued in 2006 under more relaxed lending standards.

Even with some hedgies profiting from the subprime mess, you probably won’t see the mainstream press write about it much — at least not for a few more weeks.  Fortunately, investors can be smarter as we reported in July …

There will, however, be no shortage of astute investors that understand the signs of an oversold market and smell the opportunity for huge profits. 

Amen.
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Hedge Fund News: Friday, August 31

August 31, 2007 | Leave a Comment

There is a lot going on today with the subprime situation, etc.  So, for the sake of brevity, here are some of the more compelling headlines today …

• Dispelling the ‘Bin Laden’ Options Trades [theStreet]
• Star fund manager at Janus to leave the firm [financialnews-us]
• Barclays Rescues $1.6 Billion Cairn Capital Debt Fund [bloomberg.com]
• Citi Research Discusses a Dow Crash Scenario [The Kingsland Report]
• Risk of redemptions loom over 2,000 hedge funds [financialnews-us]
• Treasuries Tumble in Asia as Bush to Propose Subprime help [reuters]

 And for a bit of fun, our friends at Fintag have some scoop on the Wall Street sequel, Money Never Sleeps

Gekko is back – as a hedge fund manager.
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Debacles, Implosions and Fraud = the SEC

August 30, 2007 | Leave a Comment

Well, times are definitely a changin’.  The SEC continues to monitor the hedge fund industry for fraud and they now have a new rule meant to deal with it.  As the FT reports …

The five SEC commissioners in July voted unanimously to adopt a new rule clarifying hedge fund fraud. It prohibits advisers to investors in hedge funds as well as pooled investor vehicles from making false or misleading statements to investors or defrauding investors and prospective investors.

The rule stems from a 2005 case before the US Court of Appeals brought by Phillip Goldstein, head of Opportunity Partners, a New York-based hedge fund. He successfully overturned the SEC’s registration requirement passed in 2004 by protesting that it would lead to hedge funds being saddled with additional compliance costs.

At the time, the SEC argued that the rapid growth of hedge funds in recent years combined with the rising interest of retail investors and a growing number of fraud cases in the industry justified the registration requirement.

HFL says: The SEC needs to find Jimmy Hoffa and bring him back from the dead.  Instead of trickling out little rules here and there over time, Jimmy would simply impose the regulations all at once (we all know its coming anyway).

Another hedge fund bites the dust: Basis Capital is now dead and ready for burial.  Another victim of the subprime situation. 

HFL says: Check out hf-implode.com.  They have a nice run through of the Basis situation.

Don’t worry your little head about the subprime situation because Sen. Chuck Schumer is on top of things — see the letter from Bernanke to Schumer here.
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What Happened to Diversification?

August 24, 2007 | Leave a Comment

Matthew Rothman at Lehman Brothers recently published a research piece in order to explain why market neutral/statistical equity arbitrage funds were getting trounced in July and August.  In short he concluded that a massive unwind of positions by multi-strategy funds and other forced sellers has caused systemic perverse performance of factor models (i.e., even though value investing makes a lot of sense, it’s not working).  So the real noodle scratcher here is that there are hundreds of quantitative hedge funds and prop desks with fancy, “differentiated” models and all sorts of bells and whistles, but at the end of the day, after all of the hocus pocus, most funds have the same long and short positions.  Has no one been able to build a better mouse trap, or is everyone still buying into the old University of Chicago value and momentum approach?  Whatever happened to artificial intelligence, principal component analysis, correlated pairs, and all of that other jazzy stuff?  Hey, they may not have always worked, but at least they were differentiated and added real diversification to portfolios. 

A word of advice to budding start ups: make sure you are really differentiated.  Before you launch, speak with your potential investors, learn what’s in THEIR portfolios and determine how your system can diversify and enhance their overall program, and then tweak if you have to.  Index product is becoming more abundant and cheap; think hard about how you will compete.

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Hedge Funds For Dummies and a Cleaning of the House

August 8, 2007 | 2 Comments

Reuters reported that hedge funds have suffered one of their worst weeks of performance in years.  Hmmm. Now, as you can imagine, at HFL, we have seen our fair share of hedge fund start ups over the years — and believe me when I tell you we could tell you some great stories.  We’ve been contacted by guys thinking they could start a hedge fund because they could make money on Ebay, folks who wanted to start a hedge fund based on the fine art purchases (we never could figure out how this particular strategy was “hedged”) and the son of a Texas tycoon who later decided to grow hemp for a living (no, his proposed hedge fund strategy was not the farming of hemp).  He only engaged in that when no one would seed his hedge fund idea (we didn’t want to touch it either).  I believe he spent some time in the can. 

But my point here is that everybody and their mother has jumped onto the hedge fund bandwagon.  It is time for some shake out and to get rid of the pikers.  Books such as Hedge Funds For Dummies hasn’t helped.

 LONDON (Reuters) - Hedge funds suffered their second-worst week of performance in four years at the end of last month, according to Hedge Fund Research (HFR.L: Quote, Profile , Research), one of the industry’s most widely respected data trackers.

A HFR spokeswoman told Reuters that in the week to July 27, the firm’s HFRX index of investable funds fell 3.01 percent.

This was the worst week of performance since the five days to March 2 this year, when the index fell 3.36 percent as global stock markets sold off sharply.

Data for the firm’s broader HFRI index, which covers a broader universe of funds including portfolios closed to new investors, was not immediately available.

A meltdown in the U.S. subprime mortgage sector, which lends to those with poor credit histories, has provoked sharp volatility in credit and stock markets, hurting the short-term performance of some hedge funds.

In the week to July 27 hedge fund firm Man Group’s (EMG.L: Quote, Profile , Research) closely-watched AHL managed futures strategy fell 6.79 percent.

Let some of the ships sink.  The industry will be better off for it.

Sub prime or Sublime?

July 19, 2007 | 1 Comment

The main stream media has done it again, and the latest feeding frenzy is the sub prime mortgage sector.  Sure, we all knew that money on the street was too cheap and consumers have been over extending themselves, particularly with respect to housing.  But as with every other panic selling situation the media has fanned the fire which has resulted in numerous hedge fund blowups, closures, and liquidations.  It’s understandable; mainstream investors gather the bulk of their intelligence from the newspaper.  These investors, trustees and board members then turn to their fund of fund managers and institutional allocators for answers.  The typical response, however, is to put in redemptions first, and ask questions later.  Rather than allowing their managers to position themselves for great buying opportunities, the average allocator prefers to exacerbate illiquidity and losses by forcing their managers to sell.  This is an age old problem within the markets and is likely to continue in cycles for decades to come. 

As structured finance becomes more sophisticated and complex, however, the potential for disaster is magnified.  In particular, structurers continue to repackage questionable securities, or repackage subordinate tranches of other structured securities in order to garner an “investment grade” rating. This works well as long as someone is buying, but once liquidity is required, the house of cards begins to collapse.  Smarter investors, however, are becoming more adept at understanding fund flows and the media impact therein and are employing proper liquidity management tools (i.e., leverage facilities, lock ups and redemptions terms, etc.).

So why is HFL jumping on the bandwagon with commentary on the sub-prime issue?  Well, it’s all about low hanging fruit.  As we have seen in the past with excessively oversold markets (e.g., distressed in 2002 and converts 2004 and 2005), the smart money is ready and waiting to buy at the bottom and reap years of rewards while the mainstream sits on the sidelines and licks their wounds inflicted by painful forced liquidations.  Consider this HFL’s call out to all players with experience in the sub prime sector: now is the time to start thinking about ramping up your own sub-prime vulture funds!  Whether you’re a victim of a downsized prop desk or a shuttered hedge fund, now is your chance to strike gold. 

Will mainstream investors think you’re crazy for starting a sub prime fund?  Certainly.  There will, however, be no shortage of astute investors that understand the signs of an oversold market and smell the opportunity for huge profits.  Furthermore, expect barriers to entry and competition to be low at this stage of the game.  Given the recent press, don’t expect capital raising to be a slam dunk.  Focus on a few core investors that are educated enough to understand the game.  Then, after 12 months of outsized returns, expect a significant ramp up in AUM.  Just be mindful of your asset liability matching; fund liquidity management will be a topic of future posts.

Bear Sterns to Their Hedge Fund Investors: No Value Left

July 18, 2007 | Leave a Comment

Most folks following the financial news are already aware of this …

July 18 (Bloomberg) — Bear Stearns Cos. told investors in its two failed hedge funds that they’ll get little if any money back after “unprecedented declines” in the value of securities used to bet on subprime mortgages …

Estimates show there is “effectively no value left” in the High-Grade Structured Credit Strategies Enhanced Leverage Fund and “very little value left” in the High-Grade Structured Credit Strategies Fund, Bear Stearns said in a two-page letter. The second fund still has “sufficient assets” to cover the $1.4 billion it owes Bear Stearns, which as a creditor gets paid back first, according to the letter, obtained yesterday by Bloomberg News from a person involved in the matter.

Wow.

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