"Another Hedgie gets a Wedgie."
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The New York Times
Weak Results Dim Hedge Funds Luster
When the hedge fund Archeus Capital opened to investors in 2003, it did so with high hopes and a glittering trading pedigree. Its co-founder, Gary K. Kilberg, was one of the aggressive Salomon Brothers bond traders memorialized in Liars Poker.
By 2005, investors, enamored of its complex trading strategies, had poured $3 billion into the fund. Within a year, however, some bad bets and administrative troubles resulted in a spate of investor withdrawals and its funds shrank. Now, its assets are down to $682 million, several partners have left and its return for the year is a negative 1.9 percent, making Archeus the latest hedge fund to fall from its gilded perch.
Hedge funds investments for institutions like pension funds and endowments and the wealthy have hit a rough patch.
Recently, a well-regarded fund, Amaranth Advisors of Greenwich, Conn., made a wrong-way bet in the energy markets and lost more than $6 billion in a week. It will dispose of its remaining assets. Even the flagship hedge fund run by Goldman Sachs, whose trading prowess has few peers on Wall Street, fell 10 percent in August. A fund at Vega Asset Management, once among the 10 largest hedge funds in the world, fell more than 11.5 percent in September, leaving it down 17.5 percent for the year. Its assets, which once topped $12 billion, are now $2 billion to $3 billion, a person close to the fund said.
"Whats happened is that as some of the opportunities have declined over the past year, its been hard to make money, said Jane Buchan, chief executive of Pacific Alternative Asset Management, which manages $7.5 billion in funds of hedge funds. And people have had different responses: some have stuck to their knitting, others increase leverage or trade directionally.
If bull markets make geniuses, uncertainty unmasks them. Volatile energy markets decimated Amaranth, and bad bond bets and administrative issues sideswiped Archeus. The turnaround in the stock market the major indexes fell sharply in the late spring and have since climbed back has also tripped up hedge fund giants as well as some big-name start-ups that have struggled to meet already-diminished investor expectations.
Returns for many hedge funds, which are supposed to be the market beaters, have paled in comparison with stocks. Hedge Fund Researchs weighted composite index is up 7.23 percent through September, according to a preliminary estimate, compared with the Standard & Poors 500-stock index, which, with dividends, has a total return of 12.4 percent over the same period.
And yet investors have hardly blinked. Eager for the rich, if not always predictable, returns that hedge funds promise, they continue to pour money into them and hope the next fund with a big problem will not be one of theirs.
In the hedge fund world, everybody is looking at their portfolio and asking themselves: Do I have another Amaranth in my portfolio? said Tim Cook, the president of Kailas Capital, an investor in hedge funds.
The rise of hedge funds fame and fortune happened quickly. In 2000, the stock market began to slide, and almost overnight, a band of obscure money managers became the new millenniums masters of the universe. Soon, huge buckets of money rained on these stars $99 billion flooded into hedge funds in 2002, according to Hedge Fund Research. Since the beginning of 2001, nearly 7,000 hedge funds have been started.
With eye-popping compensation the top manager took home $1.5 billion last year hedge-fund performance, and the pay derived from it, redefined everything from job prestige on Wall Street to the price for art and real estate.
So while there has been nothing like a sweeping shakeout in the business or a market crisis like the near collapse of Long-Term Capital Management in 1998, some hedge funds, including some of the high-profile safe names, have failed to show any Midas-like magic.
Many of the big-name debuts of 2004, 2005 and even 2006 have produced lackluster results. Eton Park, with $5.5 billion in assets, was up about 6 percent through mid- September and 7 percent through the end of the month. Several top executives have left, including its chief operating officer, Stu Hendel, who will return to Morgan Stanley, and Scott Prince, former head of derivatives and trading.
TPG-Axon, which was started with $2 billion to $4 billion in 2005 by a Goldman Sachs star, Dinakar Singh, was up just 2.6 percent through August, although it rebounded to show a return of 5.6 percent through the end of September. Old Lane, begun by two former top Morgan Stanley executives, John P. Havens and Vikram S. Pandit, was down 1.7 percent through August, a person briefed on the results said.
Big funds have also suffered, including Ritchie Capital and Vega, the Madrid hedge fund that in 2004 was the ninth-largest fund in the world, with $10.7 billion, according to Institutional Investor magazine. Vega Asset Management fell more than 11.5 percent for September, leaving it down 17.5 percent for the year so far.
A Vega representative did not return calls for comment.
A few activist funds, those that take pride in ridiculing poor corporate management, have also stumbled. Pirate Capital, a $1.7 billion fund, sent a letter to investors at the end of September explaining that half its investment team had quit. The fund is up 3 percent for the year.
Not all managers are suffering. The Citadel Investment Group and Highbridge Capital, both of which had tough years in 2005, are shining: Citadel is up 4.7 percent for September and about 18 percent for the year. Highbridge is up 14 percent for the year. And SAC Capital, run by Steven A. Cohen, was up 18 percent though August.
Hedge funds are Darwinian by nature: when returns are good, money flows in and when they are bad, investors scramble to get their money out as soon as possible.
So the spigot of new money into hedge funds has run hot and cold. After tapering off in 2005, with $46.9 billion flowing in, there has been a revival this year, with more than $66 billion poured into hedge funds in the first half of 2006 alone. That flood of money is not likely to end even amid the recent stumbles by hedge funds.
The pace has not changed. It is still fast," said Amy Hirsch, chief executive of Paradigm Consulting Services. "You might see a slight pause as they evaluate what happened. The question is not, Should we invest in hedge funds? but, In what manner should we invest in hedge funds?"
Pension funds, seeking to make up for years of being underfunded, have increasingly turned to hedge funds. Many funds that cater to such institutions boast they can deliver consistent medium-range returns 8 to 12 percent that permit institutions to better manage their liabilities.
And endowments, which were among the earliest adopters of hedge fund investing, do not appear to be backing away. Scripps College in Claremont, Calif., with a $240 million endowment, has almost 30 percent of its assets in hedge funds. For the fiscal year ended June 30, the endowment at Scripps was up 17.7 percent.
Hedge funds were a big contributor to that, said Patricia S. Callan, former chairwoman of the investment committee at Scripps and a member of the investment committee at the Huntington Library in San Marino. Calif. She said neither Scripps nor Huntington, which has a $200 million endowment, will change its allocation to hedge funds.
Yet Ms. Callan acknowledged that blow-ups like the one at Amaranth might lead investment committee members to give greater scrutiny to hedge funds.
"Situations like this make people read documents much more closely," she said.
Indeed, the changes that are likely to come in the wake of Amaranth will be in the form of increased vigilance by investors. Managers of funds of funds and consultants say investors may now temporarily delay their investments in hedge funds as they try to negotiate better terms to redeem their funds in the case of a crisis. And there may be calls from investors for greater disclosure, especially regarding how the funds are using leverage and derivatives.
In the case of Archeus, its marketing pitch, like that of most hedge funds, was its grasp of some of Wall Streets more abstruse trading strategies. In one of its first letters in 2003, Mr. Kilberg and his partner claimed profits from engaging in European rate skew trading, macro-oriented curve reshaping transactions and zero-coupon principal curve arbitrage.
To all but the most sophisticated trader, this is eye-glazing jargon. Which, as the hedge fund boom took form in 2001 and 2002, was precisely the point. Mr. Kilberg and other stars from Goldman Sachs, J. P. Morgan and Morgan Stanley were able to present themselves as trading savants who could marry the technical expertise of the investment banks proprietary trading desk with their own reserves of entrepreneurial energy.
But as the Archeus case shows, a funds fortunes can change ever so quickly once the market turns. It shows, too, that beyond the flashy public implosions, many funds are struggling to survive, just a few years after successful starts.
For Mr. Kilberg and his former Salomon traders, 2005 started out well as assets peaked at $3 billion. But within months, the fund began to suffer sharp losses as its main trading strategy, taking positions in bonds with an underlying portfolio of debt or derivatives, fell out of favor. Suddenly, investors were taking their money out and criticizing Mr. Kilberg for not taking on more risk. Hedge funds like Amaranth, with its focus on hot markets like natural gas, became in vogue, and Archeuss assets plunged. Compounding its problems was a failure of the funds administrator to keep proper records, leading to more redemptions.
Mr. Kilberg declined to comment.
Archeus is paring down. It has closed its London office, laid off workers and refocused its investment strategy. So far, results are less than promising. The fund was up only 1 percent in September. Now the founding partners are asking investors for a second chance.
"We have learned a great deal from the various circumstances, events and issues we have encountered and, admittedly, some of the mistakes we have made," they wrote in a letter to investors.
What remains to be seen is whether investors, chastened by the events of the last month, will give them one.
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PS: While Archeus had compliance & accounting issues unrelated to their trading strategies...there are at least 2 more Hedge Funds on the brink of collapse and closure.
Both have had recent life support infusions of credit because they doubled down into the recent downdraft in Crude Oil and Gold. If crude falls another $6 to $8, or Gold breaks $565-75 in the next month, or two...they're history.
One will be a shocker...the other a no name.
The shocker...will be another Nick Leeson-Brian Hunter story.
Will they ever learn...
Hubris + Greed x Leverage = Sayonara
#1. Never chase your losses.
#2. And don't EVER even dream of borrowong mo-money to stay in the game...especially when your creditors stand ready, willing and able to take you out.
#3. There are a couple of "Pirates of the Carribean" who specialize in taking out these types of funds...and they have unlimited resources available to them when doing so.
...just ask the Saudi who bought 36 tons of gold at the top.
Someone wanted those PetrolDollars recycled elsewhere...and someone sent a message.
Mo-messages await...you can bank on it. |
