Two articles from Bloomberg...both have generalized commentary relating one to the other....each reveal details while providing some data which speaks to the issue of self evidence. Raises questions about cookie cutter plans...on foundations of sand. Shoulda .........woulda.....coulda....
1. Hedge Funds Need to Find Better Way to Say Sorry: Matthew Lynn
Commentary by Matthew Lynn
Nov. 18 (Bloomberg) -- Investors in hedge funds might have expected to beat the market in exchange for a management fee equaling 20 percent of the profits.
If that was too much to ask for, they should have been safe in the thought that the word “hedge” had something to do with preserving their capital when the economy turned rough.
At the very least, they should have expected a decent excuse when it all went so wrong.
Unfortunately, they have been disappointed on all three counts -- and perhaps most let down on the third. As hedge funds, including GLG Partners Inc. and Man Group Plc, have turned in miserable results, the excuses have been shameful.
Lame, evasive and unimaginative. Schoolboys who were too busy playing PlayStation to finish their math homework have come up with better reasons for failure than the multimillionaire money managers of London and New York have offered.
We have seen “truly historical events,” Noam Gottesman, chairman and co-chief executive officer of GLG Partners, said in his results statement this month. Those, presumably, would be the events that pushed GLG’s share price down to less than $3 now from more than $14 last year.
The markets have “witnessed unprecedented levels of turmoil,” Peter Clarke, chief executive officer of Man Group, said while unveiling a 25 percent decline in net income. The company’s shares are valued at about 210 pence now compared with a high of 626 during the past year.
‘Difficult Period’
Managers at RAB Special Situations Co., meanwhile, seem to think the slight drop in its share price -- less than 25 pence now from 111 pence in May -- is all someone else’s fault. “This has been a difficult period for the company and economic markets generally,” Quentin Spicer, a company director, said as he presented its results.
For men on salaries that would fund a small nation for a couple of years, this is a “dog-ate-my-homework” level of apology. It simply won’t do.
There are three reasons why the explanations that the funds are offering for their poor performance are so inadequate.
First, there is no point telling us things we already know. Even the dippiest airhead must be aware the markets have been turbulent the last few months. Sophisticated investors in hedge funds certainly know about it. Of course, the markets have been turbulent. It’s an observation, not an explanation.
Time to Buy
Next, please don’t tell us about the “opportunities” the markets now present. We already know that when prices have fallen 80 percent in some places, it’s often a good time to buy. We can read the collected works of Warren Buffett as well as the next person. What we are also aware of is that the “opportunities” would be rather more compelling if we had hung on to our capital instead of giving it to a bunch of hedge-fund managers.
Lastly, quit telling us these events are “historic” or “unprecedented.” So far, this doesn’t count as the worst bear market of the past 10 years, never mind the last century. The Standard & Poor’s 500 Index more than halved in value in the first two years of this decade. The S&P has lost about 40 percent this year.
That makes it a run-of-the-mill bear market -- an event about as “historic” or “unprecedented” as a few rainy days in November. If it is news to anyone that the markets are volatile, they shouldn’t be allowed near the money-management business.
Rather than just deflecting the blame, how about some honesty instead? The first step toward fixing anything is to start acknowledging what the problem was.
Credit Crunch
Any hedge fund down more than 20 percent this year should be willing to explain why it didn’t see the crisis coming. After all, it’s not as if there wasn’t plenty of warning. Everyone had been discussing the credit crunch for months before equity and commodity prices started to tumble.
Managers should say what markets they were invested in and why. If you stuck with oil at $120 a barrel, for example, what made you think it wasn’t a bubble just waiting to burst?
Most importantly, a hedge fund should explain how it plans to avoid making the same mistake again. There isn’t much point shrugging and complaining about volatility. The markets will always be volatile. The point is to make that work for you.
Maybe a hedge fund should even consider winding itself up, and handing the money back to its investors. After all, there is no better way of saying sorry than clearing up the mess you have made and quietly departing the scene.
And if you can’t do any better than make some money when the markets are up and lose it when they are down, you don’t deserve a 20 percent performance fee. Anyone can do that. And some might even have the decency to apologize when they get it wrong.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.
Last Updated: November 17, 2008 19:01 EST
2. Tepper, Barakett Abandon Stocks as Funds Cut Holdings (Update2)
By Miles Weiss and Katherine Burton
Nov. 17 (Bloomberg) -- Hedge-fund manager David Tepper entered the third quarter with $3.1 billion of U.S. stocks and exited with $648 million, selling most holdings to reduce risk and raise cash as carnage spread across the financial markets.
``We moved a lot out early because we didn't want to lose money,'' said Tepper, 51, president of Appaloosa Management LP in Chatham, New Jersey. The firm, which switched some money to bonds, has between 30 percent and 40 percent of assets in cash.
The story at Appaloosa, whose returns have dropped more than 20 percent this year, was repeated across the hedge-fund world in the quarter as managers were hit by client withdrawals, tumbling financial markets and tighter credit. Regulatory filings last week by 38 hedge funds with more than $1 billion in assets each show that selling and market declines cut the value of their reported holdings by about 30 percent to $273 billion.
The $1.7 trillion industry, which accounts for about a third of U.S. equity trading, continued to retrench in the past two months, contributing to the 25 percent decline by the Standard & Poor's 500 Index since Sept. 30. At least 75 funds have liquidated or halted redemptions this year. With the Nov. 15 deadline for year-end withdrawal requests now past, fund managers may be forced to unload more stocks to pay off clients.
``Hedge funds generally are the tip of the spear in good times and they are also the canary in the cage in tough times,'' said Andrew Lo, a finance professor at the MIT Sloan School of Management who also helps run a fund for AlphaSimplex Group LLC in Cambridge, Massachusetts. ``They are the first to get hit up with losses and the first to get out.''
Atticus, Tudor
Money managers who oversee more than $100 million of equities more must file, within 45 days of the end of each quarter, a Form 13F with the Securities and Exchange Commission that lists their U.S. exchange-traded stocks, options and convertible bonds. The filings don't show non-U.S. securities or how much cash the firms are sitting on.
Almost all the major hedge funds submit their reports within a few hours of the deadline, which was Nov. 14 for the third quarter. Managers of the private, largely unregulated pools of capital can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested.
Atticus Capital LP, based in New York, said its holdings declined to $510 million from $8.1 billion. The firm, run by Timothy Barakett, 43, sold out of 39 stocks while adding no new holdings. ConocoPhillips, MasterCard Inc. and Burlington Northern Santa Fe Corp. were the three largest positions he exited, with a combined market value of $2.68 billion as of Sept. 30.
Half Cash
In an Oct. 1 letter to investors, David Slager, 36, who manages the Atticus European Fund, told investors that more than 50 percent of his fund was in cash or U.S. Treasuries after he lost 43.5 percent year-to-date.
At Tudor Investment Corp., the Greenwich, Connecticut, hedge-fund group founded by Paul Tudor Jones, 13F holdings fell to $453 million from $5.7 billion. Jones said markets face more selling from managers.
``Our concern now is less over year-end fund redemptions, as record cash balances have already been raised in anticipation, but with prospective fund closures,'' Jones, 54, said in an Oct. 31 report to his clients. ``This latter event represents a tipping point at which a fund's call on the market for liquidity goes non-linear.''
Moore, Vinik
SAC Capital Advisors LLC of Stamford, Connecticut, said its holdings were $7.7 billion as of Sept. 30, down from $14.4 billion at June 30. Founder Steven Cohen, 52, had about half the firm's assets in cash in mid-October, after his main fund fell 5 percent through September.
Louis Bacon's Moore Capital Management LLC said the value of its 13F securities fell 69 percent to $1.4 billion, while at Jana Partners LLC, a firm overseen by Barry Rosenstein that makes activist investments, they fell to $2.1 billion from $5.9 billion. Both firms are based in New York.
Jeffrey Vinik, who once ran the Fidelity Magellan Fund, disclosed that his Boston-based Vinik Asset Management LP held $1.8 billion at Sept. 30, down from $11.8 billion at June 30.
``Movements in financial markets were so volatile, so unpredictable and so seemingly detached from fundamentals'' that many hedge-fund managers ``didn't feel they had an edge,'' said Doug Peta, an independent market strategist in New York. ``The best thing they could do for their investors was to pull back entirely until markets returned to more of a sense of normalcy.''
Smaller Declines
The largest funds, including those run by David Shaw, Kenneth Griffin and James Simons, reported smaller declines in their holdings. At Griffin's Chicago-based Citadel Investment Group LLC, holdings listed on Citadel LP's 13F fell 11 percent to $50.4 billion. Simons's Renaissance Technologies LLC of East Setauket, New York, reported a 17 percent decline to $37.8 billion. At New York-based D.E. Shaw & Co., the filing showed a 20 percent decrease to $45.4 billion.
Officials at the hedge funds declined to comment on the 13F filings or couldn't immediately be reached.
This year has been the worst on record for hedge funds, with the average partnership losing 16 percent through October, according to data compiled by Hedge Fund Research Inc. Market losses and withdrawals may cut hedge-fund industry assets to about $1 trillion by the middle of next year, down almost 50 percent from their peak in June, said Tobias Levkovich, a Citigroup Inc. analyst, in a report yesterday.
Borrowing Squeezed
Some managers sold stocks to build cash that they can use to meet client withdrawals triggered by subpar returns. Even managers who are outperforming have gotten redemptions because their clients need cash and their other funds are frozen.
Funds have also been forced to pare their holdings as prime- brokerage units of investment banks cut back on lending and raise the price of the loans they are willing to make. And many funds may have sold stocks as the quickest and easiest way to raise cash to pay down loans on bets on other assets that had dropped in value, such as energy futures, said Leon Metzger, a former hedge fund executive.
``If you bought oil at $140, you had some margin calls,'' said Metzger, who now teaches hedge-fund management for graduate programs run by Yale University and several other schools. ``What you have to do is sell your liquid securities so you can post more collateral.''
Lehman Brothers
Moreover, on Sept. 19 the SEC temporarily banned short- selling of 799 financial-services stocks, a move that followed the bankruptcy filing by Lehman Brothers Holdings Inc., formerly the nation's fourth-largest brokerage. Hedge funds often buy some stocks and bet others will decline through short sales, and the SEC move may have prompted many managers to cut their overall holdings to prevent their portfolios from getting out of whack.
``Part of the problem you had in September was the regulatory ban on short-selling, which forced people into cutting risk in other ways,'' said Susan Crotty, a senior vice president and managing director of investment management services at Tremont Capital Management Inc., a Rye, New York, firm that invests in hedge funds on behalf of institutional clients. ``The government didn't do anybody any good by taking out the natural hedge in the market.''
To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net
Last Updated: November 17, 2008 18:00 EST
bloomberg.com |
