Running a Hedge Fund Is Causing Headaches
September 2, 2008, 7:44 am
Running a hedge fund has long been considered one of the top jobs in finance, but this summer a growing number of managers have called it quits, unable or unwilling to keep going in what is turning out to be one of the industry’s worst years, Reuters reports.
Last week, Dan Benton, whose savvy technology bets at Pequot Capital Management and Andor Capital Management catapulted him to star status, told investors he planned to shut down his fund in October. Last month, Ron Insana, a former anchor at the CNBC business network who later promised clients access to some of the world’s most famous hedge funds through his extensive contacts, told investors that it was “imprudent” to continue business.
And before that, Jeff Dobbs announced plans to shut down Turnberry Capital Management after many of his investors had already asked for their money back.
“There certainly seems to be a bigger number of hedge fund managers going out of business right now than ever before,” Brad Alford, founder of Alpha Capital Management, an advisory firm that invests in hedge funds, told Reuters.
While the three men gave different explanations for getting out of the industry, a common theme seems to be that running a hedge fund may not be worth the headache. Tumbling stock prices and a credit crunch have created volatile markets, and that has translated into losses at many hedge funds.
The average hedge fund, after posting the industry’s worst-ever returns in the first quarter, was off 3.54 percent this year through July, according to Hedge Fund Research. While that is less than the average stock mutual fund’s roughly 11 percent loss during the period, it is enough to unnerve wealthy investors, who once poured so much money into hedge funds that industry assets doubled in three years.
Hedge fund managers often promised to make money in all markets but several said that shorting stocks, a way to profit in down markets, is becoming more difficult and expensive as ever more investors are trying that strategy, making it tougher and costlier to locate the stocks to short. In a short sale, an investor borrows a stock and sells it, hoping to buy it back later at a lower price, pocketing the difference.
Potential profits have been reduced, with once-sure bets no longer so certain. As a result, the prospect of earning a 20 percent performance fee on profits atop a 2 percent management fee, numbers that lured thousands of traders and portfolio managers into the industry, is in jeopardy. Performance fees are paid for gains, not losses, and this year some individual hedge funds have lost as much as 20 percent, according to investors who have seen the data.
More global hedge funds closed their doors in the first quarter - 170 - than in the period a year earlier, when 138 funds closed, according to Hedge Fund Research. And that number is expected to rise for the second quarter when the firm releases the data next month.
“Hedge fund managers are smart people but they need a trend and there just isn’t one right now,” Mr. Alford of Alpha Capital told Reuters. “That sets the stage for a shakeout in the industry where we will soon see the haves and the have-nots.”
Adding to the difficulties, raising and keeping capital is becoming harder.
“The fact that investors are quick on the draw to pull capital out makes the management even more difficult in already trying circumstances,” Ken Miller, who tracks hedge funds as head of due diligence at Greenwich Alternative Investment, told the news service.
It is no wonder, then, that many managers are ready to retire in middle age.
“People are realizing that life is short, and it makes perfect sense for some managers to quit now,” Mike Hennessy, managing director for investments at Morgan Creek Capital Management, told Reuters. “No matter how much energy hedge fund managers have, they are only human.” |
