Vicious Cycle: The Hedge Fund Contagion

[BSD]

"BUSINESS WEEK

The Hedge Fund Contagion

Stocks, bonds, and commodities will suffer as funds dump assets. Anyone with a 401(k) will get hit


Investors on Main Street have another reason to fear opening their brokerage statements: the rapidly shrinking hedge fund industry. In the coming months, hundreds of hedge funds may shut their doors, sparking a massive fire sale on all sorts of investments. Just about anybody with a 401(k) or pension plan will feel the pain, since the sell-off will only exacerbate the plunge in stocks, bonds, and commodities—which make up the core of most people's portfolios.

The 10,000 hedge funds with more than $1.7 trillion in assets are caught in a vicious cycle. Worried investors are pulling out their money—some $31 billion through September, according to Hedge Fund Research. As part of the great deleveraging that's happening across the financial system, lenders are cutting credit lines or demanding that funds come up with more cash in what's known as a margin call. The cash squeeze is forcing hedge funds to dump holdings. "Redemptions and margin calls are exaggerating the market swings," says Timothy M. Ghriskey, co-founder of Solaris Asset Management, a $2 billion institutional fund.

Meanwhile, the Lehman Brothers bankruptcy is tying up tens of billions of dollars of hedge fund assets. Scores of money managers parked cash and other securities at the investment bank's prime brokerage operation in accounts that are now frozen. Other hedge funds had derivative deals with Lehman, complex financial transactions that could take months to unwind.

STAY OF EXECUTION?
None of those problems will clear up any time soon. It's difficult for funds that are down 30% or more to raise new money, persuade investors to stay, or retain top talent—a fatal combination that will make it impossible for many funds to stay open in this environment. The next critical deadline: Nov. 30, the final day of the year that many hedge fund investors can file to redeem their stakes. Unlike mutual funds, which trade daily, hedge fund customers can request their money only on certain dates, typically once a month or quarter.

Clients of firms with long-term records of strong returns may decide to give the funds a stay of execution even if losses are huge. That's one reason why some hedge fund managers are pleading with their customers to stick around. Citadel Investment Group CEO Ken Griffin apologized for two funds' near-30% drop since the start of the year, promising "to create value over the years to come." Ramius Capital, down 11%, is trying to keep investors from rushing for the exits by cutting expenses, an unheard-of move in this fee-hefty business.

Despite such efforts, the wreckage is likely to be significant. Charles Biderman, chief executive of TrimTabs Investment Research, estimates that 25% of hedge funds will be out of business by the end of 2009. "When [managers] are losing money for people, [they] are not getting pleasant phone calls," says Sol Waksman, founder of industry tracking service Barclay Hedge. "Some ask, 'why am I doing this?'"

The favorite holdings of hedge funds will keep bearing the brunt of the pain from the shakeout. A Goldman Sachs (GS) index that tracks the top stocks held by hedge funds dropped by 34% over the three weeks ending Oct. 10, a period when managers were frantically selling shares. The Standard & Poor's 500-stock index, by comparison, fell by 28%. Among the biggest losers: Apple (AAPL), off 31%, and Freeport-McMoRan Copper & Gold (FCX), down 51%.

Since some hedge fund managers are selling indiscriminately, even relatively good companies can get hurt. Consider MasterCard (MA). The stock dropped 33% over that same three-week period, even though revenues were up 25% last quarter. Why is that? Hedge funds, which own roughly a quarter of the credit-card company's stock, may be putting additional pressure on the shares. One major shareholder, hedge fund Atticus Capital, has lost nearly $5 billion, or 20% of assets, since the start of the year—a steep drop that fueled speculation in September that the fund wouldn't be around much longer. Manager Timothy R. Barakett has publicly denied the rumors, insisting Atticus is in the market for the long haul."

CONTINUED:
The Hedge Fund Contagion - BusinessWeek

 

[ampro]

ditto.....
Thousands of hedge funds to close, says GLG chief Emmanuel Roman - Telegraph


tick tick tick.......boom!
Dollar roars back as global debts are called in - Telegraph

 

[BSD]

"Hedge Funds: Defensive In Tone, Aggressive In Strategy

WALL STREET JOURNAL

In an effort to forestall more redemptions and panic, hedge-fund managers preached “strong stomachs” and washed their hands of responsibility for losses in the latest round of investor letters.

A review of nearly a dozen investor letters sent by hedge funds around the beginning of October finds a tone that could, at best, be described as somber — and, at worst, dire. Oaktree Capital Management L.P.’s Howard Marks called the last couple of weeks “the greatest panic I’ve ever seen,” while Tontine Associates LLC’s Jeffrey Gendell said he was “embarrassed by this performance.”

All told, Chicago-based Hedge Fund Research Inc. said assets at hedge funds declined by $210 billion in the third quarter, the biggest quarterly decline ever, with investors redeeming $31 billion in the third quarter alone. That was the largest quarterly redemption in history.

At the same time, the main focus of these letters is to calm investors sufficiently enough so that they don’t start another round of redemptions later this year — or perhaps invest more money. And to accomplish that feat, many of the letters said investors’ lack of understanding of the markets and the whims of government leaders had hurt them, rather than their own misevaluation of the current environment.

“Since our specialty is not macro forecasting, let alone guessing how some erratic actors in Washington will behave, we are not in a position to know when these headwinds will reverse,” sniffed David Einhorn’s Greenlight Capital L.P., which posted a negative return of more than 16% on each of its three funds in the third quarter, net of fees and expenses.

Mr. Einhorn should have merely followed his own advice — in its second-quarter letter, Greenlight preached cash and little action in stocks, but at the same time traded heavily all quarter long. Though the short-selling restrictions coordinated by the Securities and Exchange Commission had an impact on the fund’s strategy, it didn’t pare down bad positions nearly enough. “In hindsight, our suggestion from last quarter’s letter to go to cash and go to the beach would have been the better option,” wrote Greenlight."

CONTINUED:
MarketBeat : Hedge Funds: Defensive In Tone, Aggressive In Strategy

 

[BSD]

ditto.....
Thousands of hedge funds to close, says GLG chief Emmanuel Roman - Telegraph


tick tick tick.......boom!
Dollar roars back as global debts are called in - Telegraph

"Emmanuel Roman, of GLG Partners, said 25pc-30pc of the world's 8,000 hedge funds would disappear "in a Darwinian process", either going bust or deciding meagre profits are not worth their efforts.

"This will go down in the history books as one of the greatest fiascos of banking in 100 years," said Mr Roman, who co-runs London and New York-based GLG, a former division of Lehman Brothers Holdings with assets of $24bn (£14.8bn). "There need to be some scapegoats, and the regulators are going to go hunt people. That will be good in the long run."

His views were echoed by Professor Nouriel Roubini, a former US Treasury and presidential adviser known for his accurate prediction of financial crises, who estimated that up to 500 hedge funds would fail within months.

Both men were speaking at the same hedge fund conference in London on Thursday, and Prof Roubini said he would not be surprised if the US and other countries soon had to close their stock markets for more than a week to halt descent into "sheer panic".

The economist warned that the world is heading for a protracted recession that will end the US's financial dominance.

"It's the beginning of the decline of the US financial empire. The Great Depression ended in a massive war. I hope that's not going to happen but it's pretty ugly now," Prof Roubini said."

 

[BSD]

"Hedge fund manager Whitebox Advisors won't let customers cash out, according to a national publication that follows the lightly regulated industry that manages money for affluent individuals and institutions.

The Minneapolis firm, which runs about $4 billion in investor assets through several funds and strategies, is drafting a letter to investors that explains recent investment losses and constraints and the terms under which investors may redeem some of their money, according to the Oct. 22 edition of Hedge Fund Alert.

The publication, which circulates among investment managers, said Goldman Sachs put Whitebox in a box earlier this month by requiring that the firm double the amount of collateral it puts up against margin loans used to trade convertible bonds. That puts Whitebox in a temporary squeeze because it must put up more of its own capital and devalued holdings against its margin accounts, which are trading accounts that use borrowed money in part to invest.

Whitebox is among many hedge funds that have withheld investor funds from redemption as it seeks to buy time for a rebound or stay afloat."

 

[BSD]

(Bloomberg) --

Highland Shuts Funds Amid `Unprecedented' Disruption

Highland Capital Management LP will close its flagship Highland Crusader Fund and another hedge fund after losses on high-yield, high-risk loans and other types of debt, according to a person with knowledge of the decision.

Highland, whose total assets under management has shrunk to about $35 billion from $40 billion in March, will wind down the Crusader fund and the Highland Credit Strategies Fund over the next three years, said the person, who declined to be named because the decision isn't public. The hedge funds had combined assets of more than $1.5 billion.

The Highland Credit Strategies fund suffered from ``unprecedented market volatility and disruption,'' according to a letter to investors that was obtained by Bloomberg News. Barclays Capital Inc. seized $642 million of leveraged loans from Highland yesterday and is offering the debt for sale in an auction today, according to a person with knowledge of the situation.

Highland, founded by James Dondero and Mark Okada in Dallas in 1993, follows firms including Sailfish Capital Partners LLC and Peloton Partners LLP in closing funds after the seizure in financial markets choked off credit and sent asset values plummeting. The average price of actively traded high-yield, or leveraged, loans has dropped to 71.2 cents on the dollar from 100 cents in June last year, according to Standard & Poor's.

 

[BSD]

Hedge Funds May Cut 10,000 Jobs, Options Group Says

(Bloomberg) -- Hedge funds may cut as many as 10,000 jobs this year as they struggle with their biggest losses in almost two decades, according to estimates by executive search firm Options Group.

The industry has already eliminated 3,000 to 5,000 jobs, out of an estimated 150,000 worldwide, Michael Karp, chief executive officer of the New York-based firm, said today in an interview. Layoffs may double by the end of 2008, he said.

``It's bad out there,'' said Karp, whose firm has tracked hedge-fund hiring since 1995. ``Generating returns is not easy at the moment and as funds look to cut costs, the best way is to let go of people.''

Hedge funds, lightly regulated private pools of capital, have lost an average of 17 percent this year as the subprime- mortgage meltdown ignited a global financial crisis, according to data compiled by Chicago-based Hedge Fund Research Inc. The losses mean many firms can't collect performance fees, usually 20 percent of investment gains, while management fees, typically 2 percent of assets, have declined.

 

[BSD]

Citadel Investment Group, one of the world's most successful and influential hedge funds, has been having a miserable year with returns that have dropped 26% to 30%.

But rumors that its performance was far worse were so rife that they helped drag down the stock market on Wednesday, and prompted Citadel to take steps to set the record straight.

The rumors swirled for days and gained momentum on Tuesday morning when they were published on a financial Web site. After a complaint from Citadel, the site pulled down the item within an hour. Still, by Wednesday afternoon, the rumors were buzzing all over Wall Street -- and around the globe.


KENNETH GRIFFIN


On Wednesday, Kenneth Griffin, head of Citadel, sent a letter to investors. September, he wrote, was the "single worst month, by far, in the history of Citadel. Our performance reflected extraordinary market conditions that I did not fully anticipate, combined with regulatory changes driven more by populism than policy."

In coming weeks, Mr. Griffin wrote, the firm's earnings will continue to be volatile, "as the world manages the unfolding crisis."

Citadel has told clients that, contrary to the rumors, it has not seen its borrowing lines cut or the terms of its borrowings altered. Standard & Poor's last week affirmed its long- and short-term counterparty credit ratings at BBB+/A-2, a reasonably strong rating. The firm also has assured clients that it is on solid footing. It has $6 billion in cash.

Also, Citadel doesn't rely on prime brokers like many hedge funds. It floated its own debt. S&P lowered the outlook for Citadel debt to "negative" from "stable."

 

[BSD]

Hedge Funds Concede Errors, Profess Optimism After Worst Losses

(Bloomberg) -- 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, wrote in an Oct. 1 letter to clients.

``I am not a nervous person by nature, but should have been under the circumstances,'' wrote Gendell, whose Tontine Partners LP fund plunged 59 percent in September, leaving it down 67 percent for the year, according to investors. Gendell, 49, had expected shares of steel, engineering, airline and chemical companies to appreciate because of falling oil prices. Instead they plummeted.

Failure Rate

As much as a third of hedge funds may close in the next two years, according to a Sept. 29 report by Zurich-based analysts at Credit Suisse Group AG.


Tontine Partners
Sept 08
-59.30%
YTD
-66.70%

Copper River
Sept 08
-55.00%

Tontine Capital Partners
Sept 08
-38.50%
YTD
-31.50%

Maverick Levered
Sept 08
-35.50%

Tremblant Concentrated
Sept 08
-26.00%

Tracer
Sept 08
-21.40%
YTD
-9.20%

Maverick Regular
Sept 08
-19.50%
YTD
-21.30%

Tremblant
Sept 08
-19.30%
YTD
-28.00%

Yaupon
Sept 08
-19.20%
YTD
-19.30%

Cambrian Energy
Sept 08
-19.10%
YTD
-20.20%

Southpoint Millennium
Sept 08
-19.00%
YTD
-20.90%

TCS
Sept 08
-16.80%
YTD
-44.60%

Glenhill
Sept 08
-16.00%

Shumway Levered
Sept 08
-16.00%

Spindrift
Sept 08
-16.00%
YTD
-20.00%

North Run
Sept 08
-15.80%
YTD
-20.20%

Atticus Europe
Sept 08
-15.80%

TCI
Sept 08
-15.30%
YTD
-26.40%

Southport Energy
Sept 08
-15.10%
YTD
+8.60%

Lone Pine
Sept 08
-14.80%
YTD
-26.60%

Polygon
Sept 08
-14.50%
YTD
-19.00%

Springbok
Sept 08
-14.40%
YTD
-20.20%

Hayground Cove
Sept 08
-14.40%
YTD
-14.00%

Tiger Global
Sept 08
-14.30%
YTD
-13.70%

Kleinheinz
Sept 08
-14.00%
YTD
-31.00%

Southpoint
Sept 08
-13.60%
YTD
-20.30%

Galleon Buccaneers
Sept 08
-13.60%
YTD
-12.70%

Greenlight
Sept 08
-12.40%
YTD
-15.20%

Baypond
Sept 08
-11.80%
YTD
-22.50%

Eastside
Sept 08
-11.40%
YTD
-14.20%

Alson Signature
Sept 08
-11.10%
YTD
-19.50%

Bellman Walter
Sept 08
-11.10%

Third Pt
Sept 08
-11.00%
YTD
-17.90%

SAC Multi-Strat
Sept 08
-10.70%

Farallon
Sept 08
-10.50%

Conatus
Sept 08
-10.40%
YTD
-8.10%

Eminence
Sept 08
-10.30%
YTD
-15.30%

Tala
Sept 08
-10.30%
YTD
-27.80%

Weiss Multi-Strat
Sept 08
-10.00%
YTD
-2.60%

Corsair
Sept 08
-9.90%
YTD
-2.80%

Meditor
Sept 08
-9.40%
YTD
-3.90%

Whitebox High Yield
Sept 08
-9.30%
YTD
-8.90%

Jana Partners
Sept 08
-9.30%
YTD
-14.70%

Egerton
Sept 08
-9.30%
YTD
-20.60%

Coatue
Sept 08
-9.20%
YTD
-9.40%

Clovis
Sept 08
-9.10%
YTD
-15.40%

Gramercy Emerging Markets
Sept 08
-9.00%
YTD
-18.30%

Intrepid Multi Sector
Sept 08
-8.70%
YTD
-18.30%

Shumway Ocean
Sept 08
-8.60%
YTD
-9.00%

Coeus
Sept 08
-8.40%
YTD
-7.40%

Highbridge Long/Short Equity
Sept 08
-8.20%
YTD
-7.90%

Viking
Sept 08
-7.90%
YTD
+0.30%

Artis 2x
Sept 08
-7.80%
YTD
+13.50%

Royal
Sept 08
-7.80%
YTD
-7.00%

Intrepid
Sept 08
-7.70%
YTD
-13.00%

Valinor
Sept 08
-7.50%
YTD
-12.90%

Ivory Flagship
Sept 08
-7.50%

Taconic
Sept 08
-7.00%
YTD
-11.00%

Trilogy
Sept 08
-7.00%
YTD
-7.90%

Steel Japan
Sept 08
-6.80%
YTD
-19.50%

Seligman Technology
Sept 08
-6.80%
YTD
-3.30%

Abrams Bison
Sept 08
-6.50%
YTD
+1.40%

Kingdon
Sept 08
-6.10%
YTD
-12.40%

Camulos
Sept 08
-6.00%
YTD
-23.70%

Swiftcurrent
Sept 08
-5.80%
YTD
-12.00%

Cobalt
Sept 08
-5.60%
YTD
-2.90%

Highline
Sept 08
-5.40%
YTD
-6.00%

Davidson Kempner
Sept 08
-5.30%
YTD
-6.80%

Shannon River
Sept 08
-5.20%
YTD
-2.60%

Artis Partners
Sept 08
-4.30%
YTD
7.80%

PFM
Sept 08
-4.00%

Brant Point
Sept 08
-3.50%
YTD
-2.60%

Marea
Sept 08
-3.50%
YTD
-28.40%

PFM Tech
Sept 08
-3.40%
YTD
-6.00%

Artha
Sept 08
-3.30%
YTD
-12.80%

Alydar
Sept 08
-2.90%
YTD
-0.40%

SAB
Sept 08
-2.70%
YTD
-3.70%

Effissimo
Sept 08
-2.40%
YTD
-3.30%

Owl Creek
Sept 08
-2.30%
YTD
-9.50%

Axial
Sept 08
-2.30%

 

[BSD]

Hedge Fund Withdrawals Stress Market; Citadel Reassures Clients
By Saijel Kishan and Katherine Burton

Oct. 25 (Bloomberg) -- Hedge funds are aggravating the worst market selloff in 50 years as they dump assets to meet investor redemptions and keep lenders at bay.

U.S. hedge-fund managers may lose 15 percent of assets to withdrawals by year-end while their European rivals shed as much as 25 percent, Huw van Steenis, a Morgan Stanley analyst in London, wrote yesterday in a report to clients. Combined with investment losses, industry assets may shrink to $1.3 trillion, a 32 percent drop from the peak in June.

With the average hedge fund down 18 percent this year, as measured by the HFRX Global Index, managers are selling assets to repay departing investors and meet demands from lenders for more collateral. Others including Paulson & Co. and Winton Capital Management LLC are hoarding cash to soothe nervous clients and wait for signs the worst is over. When stocks rally, hedge funds take advantage to unload what they can.

``I have never seen a market as full of panic as I've seen in the last seven or eight weeks,'' Kenneth Griffin, founder of Citadel Investment Group LLC, a Chicago-based hedge-fund firm, said yesterday.

Citadel, addressing investor concerns that its funds may be forced to liquidate, said yesterday it has $8 billion in untapped bank credit, 30 percent of its assets in cash and ``modest'' client redemptions.

The firm had no material losses from trading partners as its main Wellington and Kensington funds fell about 35 percent this year through Oct. 17, Chief Operating Officer Gerald Beeson said on a conference call with bondholders. Year-end redemptions will be a ``few percent'' of assets.

Worst Year

Griffin, 40, who started Citadel in 1990, has posted the biggest losses of his career in 2008 after increasing wagers on loans and bonds before the markets plunged.

Most of the funds' declines occurred in the four weeks after Lehman Brothers Holdings Inc. went bankrupt, Beeson, 36, said. Kensington and Wellington lost money holding convertible bonds, high-yield bonds and bank loans, and investment-grade bonds, which were hedged with credit default swaps that protect the buyer in the event of a default.

Citadel was betting that the gap between the default swaps and the bonds would narrow. Instead, they widened as lenders left the market and investors bet that more companies would default.

``Even the healthy hedge funds are being forced to sell,'' Mohamed El-Erian, co-chief executive officer of Pacific Investment Management Co. of Newport Beach, California, said in an interview yesterday with cable-television network CNBC.

Shake-Out

John Paulson, whose New York-based Paulson Advantage Plus Fund climbed about 25 percent this year through September, was about 70 percent in cash at the end of last month, according to investors. David Harding, founder of London-based Winton Capital, said he is holding about 95 percent of assets in U.S. Treasury bills and cash or cash equivalents.

``What we're seeing now is an acceleration of the shake- out that should have happened a long time ago,'' said Peter Rup, chief investment officer at New York-based Orion Capital Management LLC, which invests in hedge funds.

The HFRX Global Index fell 7.76 percent this month through Oct. 22, according to Hedge Fund Research Inc. in Chicago. Hedge funds lost 5.4 percent last month, the most since the implosion of hedge fund Long-Term Capital Management LP a decade ago.

Passport Management LLC's Global Strategy fund fell 27 percent this month through Oct. 15, and 34 percent for the year, as investments in commodity stocks slumped, according to an investor letter. The $4.5 billion hedge-fund firm is run by John Burbank III in San Francisco.

Calming Investors

Platinum Asset Management LP, a Rye Brook, New York-based firm, lost as much as 29 percent this month through Oct. 15, bringing its year-to-date decline to 38 percent, according to investors.

Investors withdrew a record $43 billion from hedge funds last month, according to TrimTabs Investment Research in Sausalito, California.

``There's a bigger push by hedge funds to mitigate risk,'' said Matt Simon, analyst at New York-based Tabb Group, a financial-services consulting company. ``Funds are trying to keep jittery investors calm.''

LINK:
Bloomberg.com: News

 

[BSD]

"FUNDS' OCTOBER SURPRISE

HEDGES FACING WORST MONTHLY LOSSES IN DECADE

Hedge funds are once again on track to post their worst monthly return in at least a decade - and the bloodshed this time may exceed the record set 10 years ago.

As of last week, the average hedge fund was down 8.4 percent for Oct., according to research firm Hedge Fund Research. That's neck-and-neck with the worst performance for hedge funds ever recorded: A decline of 8.7 percent in August 1998.

The mounting losses are hurting even the biggest names in the business - testing the long-held theory that the large, institutional guys are better insulated than everyone else.

JPMorgan Asset Management, which has long reigned as the nation's largest hedge fund, lost $7 billion in assets since the start of July, bringing its new total to $41 billion.

Bridgewater Associates, the nation's second-largest hedge fund, saw assets drop to $38 billion from $43.5 billion, even as its flagship fund posted returns of about 10 percent, The Post has learned.

For the year, hedge funds are down more than 19 percent, according to data obtained by The Post.

The declines have led many funds to already adopt a number of emergency actions to limit the bleeding, including laying off workers, implementing emergency gates to keep withdrawals to a minimum and cutting fees.

Yesterday, Highbridge Capital Management, which is majority owned by JPMorgan, became the latest to announce cutbacks. It reduced its staff by 10 percent, or 35 people, amid losses in some of its funds.

Those that do well, on the other hand, are expected to be rewarded when the dust settles, said Ferenc Sanderson, a hedge-fund researcher. He expects the winners to be able to "jack up their fees," even as the losers cut fees to stop investors from leaving.

John Paulson's $35 billion Paulson & Co. is among those that has managed to thrive amid the carnage, posting returns of between 5 percent and 25 percent this year, according to the data.

And PayPal founder Peter Theil's Clarium Capital is up 18.9 percent through September, despite a loss of 6.8 percent last month, according to the report.

In September, hedge funds lost between 5.5 percent and 7.5 percent, depending on the data source. At the time, it was considered the worst month for hedge funds since the 1998 debacle, which was triggered by the implosion of hedge fund Long-Term Capital."

[email protected]

LINK:
HEDGE FUNDS DROP 8.4% IN WORST MONTHLY LOSS IN OVER A DECADE - New York Post