# Hedge funds: all you need to know, in plain English



## drillinto (11 April 2007)

http://nymag.com/news/features/hedgefunds/


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## drillinto (13 May 2007)

Must Read Article

http://www.cfo.com/article.cfm/9114673/c_9116405?f=home_todayinfinance


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## drillinto (16 May 2007)

According to reliable research, as much as 50% of the trading in U. S. stock markets is now done by hedge funds

Digg this

http://www.zacks.com/experts/featured/view_article.php?art_id=2893&newsletter_id=190&


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## drillinto (11 June 2007)

A wonder of capitalism: the activist hedge funds

http://www.theglobeandmail.com/servlet/story/LAC.20070607.DECLOET07/TPStory/Business


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## drillinto (13 June 2007)

Islamic hedge is booming

http://investing.reuters.co.uk/news...7Z_01_NOA824762_RTRUKOC_0_ISLAMIC-HEDGING.xml


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## drillinto (23 June 2007)

What caused Bear Stearns' hedge fund problems?

By JEREMY HERRON
Associated Press, June 20, 2007

 NEW YORK ”” A big Bear Stearns hedge fund is close to collapse. That would mean heavy losses for the investment bank and lots of buzz on the New York financial scene. That's bad for Bear Stearns, but for the average person, what's the big deal?

In this case, the problem is that the fund invested heavily in bonds backed by risky mortgages and its dissolution could have implications far beyond Wall Street. On Wednesday, investor Merrill Lynch & Co. launched a fund asset auction.

Some questions and answers follow about what the fund is, why it is in trouble and what its demise might mean for homeowners and investors.

Q: What does this Bear Stearns hedge fund do?

A: Like any hedge fund, its goal is to generate outsized returns using complicated investment strategies that are typically risky.

This one, called High-Grade Structured Credit Strategies Enhanced Leverage Fund, was started 10 months ago and invested mostly in securities related to risky mortgages, known as subprime loans. It is estimated to hold invested capital of more than $600 million and total borrowings of about $6 billion, although specific figures are not available.

Q: So does the fund own individual mortgages? Could it own my mortgage?

A: No. The fund invests in things like bonds that are backed by individual mortgages. Banks and other mortgage originators make the loans to consumers, package groups of similar mortgages together and sell them to investors in a process called securitization.

Q: What went wrong with the Enhanced Leverage fund?

A: The fund reportedly lost 23 percent of its value in the first four months of the year. The specific reasons are not clear, but starting earlier this year, there was a sharp increase in the number of delinquencies and defaults on loans made to borrowers with spotty credit histories. Bonds backed by these subprime mortgages lost much of their value, before stabilizing somewhat in April and May.

The decline led one big investor, Merrill Lynch & Co., to ask for its money back. When Bear Stearns balked, Merrill Lynch requested its collateral for the loan ”” at least $800 million in bonds.

Q: Why is that a problem for a $6 billion fund?

A: Because the bonds Merrill took have high ratings, leaving the fund with a higher percentage of risky investments. And if an investor as prominent as Merrill wants out, it is possible that other financiers will, too.

Q: What would the fund's collapse mean for the broader market?

A: It will likely not lead to any major correction, but could signal the start of a shift in how the market values risk.

During the recent bull run, lenders have charged a low premium to borrow money to make risky investments. As more of these securities falter, lenders will start asking for more in return. That would lead to higher volatility in the prices of securities.

Q: What does this mean to potential home buyers?

A: Big losses in subprime investments are likely to make investors more reluctant to risk their money on these instruments in the future.

That will make it harder for mortgage originators like banks to sell these types of loans in bundles to the bond markets, which will, in turn, reduce the availability of funds for subprime loans.


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## drillinto (28 June 2007)

Bill Gross (Pimco's Chief) says that the fallout of subprime debt is likely to hit Main Street harder than Wall Street

http://www.cnbc.com/id/19436314


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## drillinto (28 June 2007)

Top ten list of hedge fund manager quotes

http://paul.kedrosky.com/archives/2007/06/24/top_ten_list_of.html


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## drillinto (5 July 2007)

Hedge funds may not be as crash-proof as once thought
::::::::::::::::::::::::::::::::::::::::::::::::::

Hedge Funds Mystify Markets, Regulators
Deeply Powerful, Largely Unchecked

By David Cho
Washington Post Staff Writer
Wednesday, July 4, 2007


Wall Street chroniclers one day could look back at the early 21st century and easily dub it the Era of the Hedge Fund. The question is whether it will be remembered as an age of reason or irrational exuberance.

Hedge funds hold unparalleled sway over the financial markets, as confirmed by the recent unraveling of $20 billion in Bear Stearns funds. Portrayed as the new masters of the universe by author Tom Wolfe, hedge-fund managers are responsible for more than a third of stock trades and control more than $2 trillion worth of assets, according to industry researchers. Each of the top hedge-fund managers earned more than $1 billion in 2006 alone.

But like the Wizard of Oz, these funds hide behind a cloak of mystery as they pull the levers that make Wall Street go. "To a great degree they're unregulated and hardly understood or not understood at all," said James Grant, publisher of Grant's Interest Rate Observer.

Understanding the impact of this secretive world gained urgency in Washington after the crisis at the two Bear Stearns hedge funds sent the Dow Jones industrial average down 279 points and prompted the Securities and Exchange Commission to begin an informal investigation last week.

The Bear Stearns funds were on the cutting edge of the hedge-fund world that reaps billions of dollars from slicing up corporate loans, mortgages and other kinds of debt into pieces that can be traded like shares on the stock market. This process is considered by many bankers and regulators to be one of the great advances in finance over the past five years. With hedge funds acting like shock absorbers, investment banks and lenders have been able to make massive loans to freewheeling borrowers and feel less impact from the risk.

Money became easy to get and was easily lent. Banks offered huge mortgages to people with questionable credit. The business of borrowing billions of dollars to buy troubled companies boomed. Backed by hedge funds, insurance companies could offer coverage to homeowners in New Orleans after Hurricane Katrina.

Some analysts say hedge funds have become more important financiers than the long-established investment firms of Wall Street. Greenwich, Conn., where more than half of the biggest hedge funds are based, has earned nicknames such as "The New Wall Street" and "Hedgistan." It also has become one of the most important stops along the presidential campaign fundraising trail.

Yet the trouble at Bear Stearns is revealing that the system may not be as crash-proof as once thought. And it has left Washington regulators and Wall Street analysts with questions: How dependent has the new financial system become on hedge funds? Are their trades getting more risky? If one of them unravels, who absorbs those losses?

The answers are unclear, even to top economists. Part of the problem is that most hedge funds do not reveal much about their trading activities. Many operate offshore. Even for the ones that are based in the United States, no federal agency is empowered to regulate or watch their activities.

The SEC in 2004 passed a rule requiring hedge-fund managers to register with the agency and submit to some oversight. But a U.S. Court of Appeals struck down that rule in June 2006. Later that summer, SEC Chairman Christopher Cox testified to the Senate Banking Committee that hedge funds were operating in a "gap" in the SEC's authority, but he fell short of asking Congress to address the issue through legislation.

The President's Working Group on Financial Markets, which was founded after the collapse of hedge fund Long Term Capital Management in 1998, said in February that hedge funds needed no regulation.

Yet many market watchers worry that, shielded from regulators and operating in the dark, the biggest and most influential hedge funds might be making bets that put the entire financial system at risk. As the two Bear Stearns funds demonstrated, some hedge funds are investing large amounts of money in complex securities that are difficult to value accurately. And much of it is being done with borrowed money -- or "leverage" -- which can magnify returns but also exacerbate losses.

"There's been a fundamental change in the debt markets that I don't think people appreciate yet," said Richard Bookstaber, who has managed hedge funds and recently wrote a book on the topic, "A Demon of Our Own Design."

"I don't think anybody knows how much leverage a particular [group] of hedge funds is using or how much leverage has grown. . . . We are running the risk of making the markets more levered and more complex so that something can go wrong all of a sudden," Bookstaber said.

So what is a hedge fund?

For starters, hedge funds take money only from those with deep pockets. They pool huge amounts of money mainly from super-wealthy investors, Wall Street banks and other hedge funds. About 25 percent of their money comes from pension funds and endowments, according to data from Greenwich Associates.

In the late 1940s, managers of the first hedge funds invented ways to make money no matter which way the stock market was moving. They used terms like "short the market" -- a technique for profiting when stocks go down -- and "going long" -- which means selling stocks after their prices have gone up. The trick was figuring out how many "short" and "long" positions a manager should have in a portfolio.

But to understand what hedge funds do today, it could take "two PhDs and an MBA," as Greenwich Associates hedge-fund analyst Karan Sampson put it.

Some funds bet on how stocks, gold prices and interest rates will move. Others turn almost any kind of cash flow -- including credit card payments, home mortgages, corporate loans, plane leases, and even movie theater revenue -- into bonds and trade them.

One of the most successful fund managers, Edward S. Lampert of ESL Investments, runs an $18 billion fund that makes money in part from what are called "total return swaps." These provide insurance for traders holding risky investments. If the investment goes down, Lampert absorbs the loss, but if it goes up, he enjoys the gain. In exchange for agreeing to the swap, the trader gets regular cash payments from Lampert.

Lampert's fund reportedly has earned returns of 30 percent every year by trading in swaps and other obscure financial tools. He personally made more than $1 billion last year. Most fund managers get their pay by taking a 20 percent cut of the profits from their trades and collecting from investors a 2 percent annual fee based on the total value of a portfolio.

Former Federal Reserve Chairman Alan Greenspan was an advocate for how hedge funds help spread investment risk across many partners. The concept of "risk dispersion" has been described by Federal Reserve Governor Donald L. Kohn as a pillar of the "Greenspan doctrine." Over the past five years, advocates say, it has created a more stable financial system.

In 1998, just when hedge funds were starting to become big, Long Term Capital Management collapsed, nearly paralyzing the U.S. bond market. The disruption was so severe that the Fed had to organize a temporary rescue. The fund lost about $3.6 billion before closing in 2000.

But when the Amaranth hedge fund imploded in September 2006, losing about $6.4 billion on bad bets in natural-gas commodities, federal regulators stayed on the sidelines. Returns plummeted for a few hedge-fund managers and a pension fund in San Diego, but the markets generally shrugged off the news.

The new financial system seemed to be working.

Still, a growing number of market watchers wonder whether the system is encouraging hedge funds to take on too much risk.

"It's a weird dynamic that the market has now," said Dan Freed, a senior writer at Investment Dealer's Digest. "You used to have a small number of institutions taking a lot of risk. Now you take something that's toxic and you divide it into a thousand pieces and you say, okay, well, it's not toxic anymore. . . . But if it's toxic, isn't it [still] toxic?"

The Bear Stearns hedge-fund managers not only made risky bets but also did so with massive loans. They raised hundreds of millions of dollars from wealthy investors and other hedge funds, and borrowed many times that amount from Wall Street banks. With $20 billion at their disposal, they traded obscure securities backed by mortgage loans made to homeowners with shoddy credit histories.

The securities were so exotic that few knew whether the managers were getting good prices as they traded them.

The problem is similar to what happens in the housing market. Because houses are "traded" infrequently, homeowners often struggle to figure out the right price to attract interest. An appraisal can help, but a house's actual value is established only when a buyer and seller agree on a price.

Stocks, on the other hand, are exchanged every day, so their prices generally are considered accurate.

In the case of the Bear Stearns funds, the managers appeared to struggle to value their assets accurately or find buyers for them. In May, they said the funds had lost 6.75 percent of their value in April. In June, they revised that loss to 18 percent. The revision spooked traders, and ultimately some of their assets had to be dumped in a fire sale. Bear Stearns also lent $3.2 billion to bail out one of the funds after Wall Street banks demanded their money back.

Analysts worried about the ripple effects. Other hedge funds holding similar securities had to mark down the value of their assets. Banks suddenly got skittish about making big loans...

[Note: The article was slightly shortened to fit ASF]


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## Prem (5 July 2007)

Thanks very much!! 

This information is all very helpfull.


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## porkpie324 (5 July 2007)

Not much talk about Australia's largest hedge fund(s) OMIP  run by MAN group. All I know is that I took out 8 of these funds and they have all made heaps the first 2 have now matured and have quadrupled in price, the rest going along quite well. porkpie


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## drillinto (11 July 2007)

Anthony Bolton sees coming decline in investor confidence

See how he protects his fund, Fidelity International

http://www.iht.com/articles/2007/07/04/business/bxinvest.php


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## drillinto (12 July 2007)

The rising hedge fund stars

http://ftalphaville.ft.com/blog/2007/07/05/5688/the-20-rising-hedge-fund-stars/


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## Temjin (13 July 2007)

Excellent Info there, drillinto, much appreciated!!!!!

All these concerns from the articles does give me a new insight on how risky some of these large hedge funds really are.

The thing that got me REALLY alarmed is how all these hedge funds are playing with asset classes such as Mortgage Backed Securities (MBS), Collateralised Debt Obligations (CDO) and Collateralised Loan Obligations (CLO).

I am a firm believer that most first world countries, like the US and the UK, and even Australia, are enjoying their economic propersity by taking on too much debt for both the public and private sector. (refer to another thread listed on this forum) And I am a firm believer that sooner or later, such explosion in easy credit and increase in debt will not sustain itself and everything will come down in a massive crash when us "rich" first world countries goes bankrupt or default on their huge loan. 

As noted in those articles, big hedge funds collapsed due to the default of their loan tied to their trading bonds and thus, some of these hedge funds whom heavily invested and leveraged in such risky assets may sooner or later found themselves in deep trouble as defaults on loan become more prodominately common as the economy can no longer support the mountain of debt.


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## drillinto (14 July 2007)

Australian hedge fund warns about withdrawals

By James Mackintosh / Financial Times

July 11, 2007 

An Australian hedge fund manager with $1bn in structured credits and junk-rated loans warned investors yesterday it could restrict withdrawals to ensure its survival as it reported losses of 14 per cent in one fund in June.

Basis Capital, based in Sydney, said in a letter to investors it had been hit by “indiscriminate” repricing of “otherwise fundamentally sound collateral” amid the crisis in US home loans to less creditworthy investors. It said it had deliberately avoided the worst-hit 2006 subprime loans.

The warning that redemptions can be restricted comes as a series of hedge funds in the US and UK have run into trouble from the collapse in price of illiquid, or hard-to-trade, securities linked to subprime loans.

Restrictions on redemptions are closely monitored by hedge fund investors as an indication of trouble. 

Any limit tends to prompt a rush for the exit by other shareholders, forcing a fire-sale of assets to raise cash to meet the pay-outs.

Braddock Financial, based in Denver, said last week it would close its $300m Galena Street fund because of redemption requests, while United Capital Holdings, in Florida, suspended redemptions.

Basis Capital, run by Steve Howell and Stuart Fowler, said the quarterly limits it imposed on redemptions – known as gates – were “designed at inception to ensure the [fund’s] survival through periods of extreme dislocation such as this”.

Rick Bernie, a director, said he expected the gates to be used, although redemption requests had not yet come through. “We’ve always said when the world blows up, if you don’t have a tight enough gate it is like saying, ‘Pick us first’ [to redeem],” he said.

Mr Bernie said structured credits were cheap but Basis was not buying because it had to keep enough liquidity to anticipate redemptions.

Basis Yield Alpha fund was down 13.93 per cent in June, only its second monthly loss since it was set up in 2003. Basis Pac-Rim Opportunity fund, with less structured credit exposure, was down 9.2 per cent.

Both funds demand 90 days’ notice for redemptions, which are allowed each quarter, with an extra fee to redeem between those dates.

Hedge fund investors warned that more funds were likely to limit redemptions to prevent forced sales of illiquid assets at low prices, but that the true scale of the problem might not become clear until September.

David Smith, chief investment director of multi-manager funds at GAM, said most funds had quarterly withdrawals, and they would not need to tell investors they were imposing restrictions until the money was due to be repaid.

“It is the end of September, or even December, that everyone will ee just how bad it is,” he said.


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## Temjin (14 July 2007)

drillinto said:


> Australian hedge fund warns about withdrawals
> 
> By James Mackintosh / Financial Times
> 
> ...




FOOOK!!!

I just invested in this fund like....in late June, but I haven't heard anything yet...and the latest account statement I got (from my wrap portfolio) has not shown the drop in value yet. (actually, not even know if my wrap provider actually invested into it....since I just started and haven't even receive access to my online account yet!) 

This is such a coincidence and utter bad luck for me. I didn't knew about the dangers of such hedge funds until your posts here. And only till I realised the dangers, I already decided it to invest into it (via margin lending too) and allocate almost 40% of it due to its high sharpe ratio performance.

Now it is time to redempt it and get out at a lost asap. Don't care about it anymore....sigh..


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## Kimosabi (15 July 2007)

Hedge Funds are a huge scam, avoid them like the plague, unless of course you like blowing all your money...


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## drillinto (12 August 2007)

Must-read from the WSJ
***********

Blind to Trend,
'Quant' Funds
Pay Heavy Price

Computer Models Failed
To See Risk Increasing

By HENNY SENDER and KATE KELLY
WSJ, August 9, 2007

Computers don't always work.

That was the lesson so far this month for many so-called quant[quantitative] hedge funds, whose trading is dictated by complex computer programs.

The markets' volatility of the past few weeks has taken a toll on many widely known funds for sophisticated investors, notably a once-highflying hedge fund at Wall Street's Goldman Sachs Group Inc.

Global Alpha, Goldman's widely known internal hedge fund, is now down about 16% for the year after a choppy July, when its performance fell about 8%, according to people briefed on the matter. The fund, based in New York, manages about $9 billion.

The fund's traders in recent days have been selling certain risky positions, according to these people. Early this week, those moves sparked widespread rumors on Wall Street that the entire fund might be shut down. A Goldman spokesman has said the rumors are "categorically untrue."

Campbell & Co., an $11 billion hedge fund that trades in the futures market as well as in stocks and bonds and is completely driven by such computer programs, was down 10% to 12% by the end of July.

Quant funds -- "quant" stands for quantitative -- generally operate by building computer models of market behavior and then allowing the computer programs to dictate trading. A recurring characteristic of the recent trouble in financial markets is that many lenders, funds and brokerages were following statistical models that grossly underestimated how risky the market environment had become.

"Our risk models failed to pick up the fact that we were due for a correction," says Keith Campbell, founder of Campbell & Co. "We were highly diversified. It was the perfect negative storm."

Campbell's losses occurred because of wrong bets on interest rates, currencies and stocks. While Mr. Campbell declined to disclose just how much leverage was behind his trades, he says Campbell isn't "a highly levered house."

He told investors that the losses stemmed from "a unique combination" of factors. These included the unwinding of the world-wide carry trade -- where investors borrow money in low-interest-rate currencies to invest in higher-yielding assets -- an investor flight toward less-risky investments and the stock market's reversal.

Mr. Campbell called the recent market turmoil "very unusual." Critics say that is one of the drawbacks of the investing style. Much of the time, the market can be accurately modeled by computer programs. The times when they don't work are treacherous.

"All [computer-driven] managers say the models make sense and look like they are working," says Bill Johnston, founder of Bayon Capital, an investment fund based in San Francisco that isn't computer-driven. "But then something happens which statistical probability suggests would never happen."

Rumors of forced selling in the wake of losses contributed to the volatile ride in the stock market yesterday.

Renaissance Technologies Corp., the most successful quantitative-hedge-fund manager, is holding up despite the market's downturn. Renaissance's flagship Medallion hedge fund is up about 25% so far this year, while the firm's Renaissance Institutional Equities Fund is down slightly, according to a person close to the firm, though the gains have been cut in recent days. Medallion made money in July, though it hasn't fared as well so far in August, the person said. The Institutional fund lost about 3% in July, in line with the overall market.

Other hedge funds declined to disclose to brokers or portfolio managers in charge of so-called funds of hedge funds just how badly wounded they have been by the recent extreme swings.

In most cases, their losses had nothing to do with the meltdown in the subprime-mortgage market and occurred across all strategies. Moreover, in many cases, those losses were magnified by the use of borrowed money.

Yesterday, many fund managers were watching for additional knock-on effects of recent losses, which have forced funds like Global Alpha to liquidate certain risky positions. Some think the pain will next be felt overseas, in places such as the United Kingdom and Japan, where asset managers are also likely to begin offloading riskier bets.

The reliance on models can be especially problematic because many quant hedge funds have very similar models. That means they are often doing the same trades and buying the same shares. Moreover, because the strategies are supposed to be market-neutral, with no net positive or negative bent, the funds often borrow large sums so they can bet more and achieve better returns when things go their way.

That massive borrowing adds to the pressure when markets reverse course several times in the course of a single day, as the stock market has done repeatedly in recent weeks, or when tried-and-true relationships between different markets suddenly break down.


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## Awesomandy (12 August 2007)

Some hedge funds are quite good, actually. They actually aim to deliver positive returns in all market conditions. Surely, they lose out in strong bull markets, but their returns continue to pile in bear markets. It doesn't matter what assets they trade in (or do not trade in), they should still achieve reasonable positive returns for most (if not all) of the time.

Of course, you also have some less disciplined funds that would bet their whole account on an event - e.g. some funds have used their total equity in their derivative accounts to short the whole market. If they get lucky (which they did the past few days), then it's all good... everyone's happy. Although, if there were any unexpected good news... wipe out!


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## drillinto (16 August 2007)

How To Speak Hedgie

Article URL: http://www.slate.com/id/2172224/


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## drillinto (16 August 2007)

Must-read from WSJ
:::::::::::::::::::::::::::::::

Dear Investors, We're...

Hedge Funds Strain
To Find Words to Say
'Sorry' for Your Losses

By GREGORY ZUCKERMAN / WSJ
August 16, 2007

Running a hedge fund means never having to say you're sorry, at least not in so many words.

That isn't to say some hedge-fund managers don't have a lot to feel bad about. In the past few weeks, some of the biggest names in hedge-fund land -- Goldman Sachs Group, Highbridge Capital Management, AQR Capital Management, Renaissance Technologies -- have certain funds that lost as much as a third of investors' money as stock and credit markets seized up, and stocks moved in unexpected ways, in reaction to the spreading subprime-mortgage debacle.

None of these highly paid managers are prostrating themselves before their clients, begging forgiveness, however. Instead, in letters to clients, they point fingers at other hedge funds, once-in-a-lifetime events and their own computer programs.

Black Mesa Capital, a Santa Fe, N.M., hedge fund captured the "don't blame us" spirit with its letter last week, blaming "unprecedented market events," including "a very large or several very large trading entities, possibly very large hedge funds...liquidating massive" portfolios. The managers, Dave DeMers and Jonathan Spring, said they are taking "unprecedented actions" to fix its problems, a response to the "unprecedented market events." The fund lost about 10% in the first eight days of August. Black Mesa didn't respond to a request for comment.

DEAR INVESTORS,

"If the rumors are that we've had better weeks, then they are accurate. If the rumors are that we are in some pain over the recent widespread quant stock selection woes, then they are accurate. If the rumors are more severe than that, then they are simply false." 
-- Clifford S. Asness, managing and founding principal, AQR Capital Management
* * *
"Regrettably we have not had good luck during these last few days of August. We have been caught in what appears to be a large wave of de-leveraging on the part of quantitative long/short hedge funds.
-- Jim Simons, president, Renaissance Technologies
* * *
"As you know from the daily net asset value estimates which we make available to you, our performance has been disappointing." 
-- Tykhe Capital
* * *
"Based on our own research and market knowledge, we believe that this increase in volatility is technical rather than fundamental in nature." 
-- Minder Cheng, managing director, Barclays Global Investors
* * *
"There was (and is) the possibility that, as great as liquidations had been so far, that it was just the beginning of a spiral of me-too liquidations. The question was, when will it end? The answer is, we don't know." 
-- Dave DeMers and Jonathan Spring, Black Mesa Capital
* * *
"We have always attempted to do the very best for our investors. A loss of this magnitude in such a short period is as devastating to us as it is to you." 
-- Jeff Larson, Sowood Capital Management
* * *
"We have been actively managing our exposures through this challenging environment and will be in contact with you shortly to give you an additional update." 
-- Highbridge Capital Management
* * *
Highbridge, which saw its $1.7 billion statistical-arbitrage fund lose 18% in just the first eight days of the month, sent out a letter pointing to other hedge funds, who the firm said were making similar trades, rather than explaining Highbridge's own mistakes. "As you may be aware, many hedge funds and asset management firms utilizing similar strategies are experiencing unprecedented volatility," said the firm, which has $37 billion in total assets. 

Goldman's letter portrayed the firm's money-losing hedge funds as innocent bystanders, caught up in a violent market.

"The quantitative funds run by Goldman Sachs Asset Management have not been spared in this difficult environment," said the Goldman letter, sent Aug. 13, explaining why its hedge funds lost between 17% and 34% in the first 10 days of the month. "Our response has been comprehensive and immediate." Goldman didn't respond to a request for comment.

A simple mea culpa would be more satisfying for many investors. "I would like to hear an 'I'm sorry,'" says Jane Buchan of Pacific Asset Management Co., an Irvine, Calif., firm that invests in hedge funds.

The recent pain has largely centered on quantitative hedge funds, which rely on computer models of the sort more often developed by math whizzes than English majors. So, some of the explanations are heavy on the jargon. "The culprit is not the Basic System but our predictive overlay," said Jim Simons, who runs Renaissance Technologies, one of the largest hedge funds, in an Aug. 9 letter telling investors that one of his funds had lost almost 9% in the first eight days of August. He's gained back a chunk of that in the past few days.

"When you've done your best, there isn't a great deal to apologize for, the event was a whirlwind that caught everyone by surprise. It certainly caught us by surprise," Mr. Simons said in an interview. "But not having anything to apologize for and not feeling bad are two different things -- certainly, I feel bad for anyone losing money."

Lawyers say they advise hedge managers to detail losses quickly, but restrict their explanations to the facts. Owning up to mistakes or apologies could give an opening to investors to level lawsuits, they say.

"It's sort of like how doctors never say they're sorry," says David Moody, a partner at law firm Purrington Moody Weil. "It's an invitation for a lawsuit."

One major hedge-fund manager admits to using the word "sorry" in his letter to investors, but striking it at the last moment, arguing that he had nothing to apologize for. Another executive argued that funds sending out letters were treating their investors better than other big losers who have left their investors in the dark.

"Don't sugarcoat it," says Jacqueline Whitmore, a Palm Beach, Fla., author who gives speeches about business etiquette. "There's a hesitation to want to say that you were wrong, but it can be worded in a way where you can tell the truth, but it doesn't sound like this is the end of the world."

Clifford Asness, a founding principal of AQR, a Greenwich, Conn., firm, was blunt about his failure. But he blamed others, too. "Our stock-selection investment process, a long-term winning strategy, has very recently been shockingly bad for us and for all of those pursuing similar strategies," wrote Mr. Asness, whose largest fund is now flat on the year. "The very success of the strategy over time has drawn too many investors. Now, we are witnessing some of them exit, and...it's painful." 

But there are times when the losses are so bad that hedge-fund honchos feel the need to give a full mea culpa. When Sowood Capital, a Boston hedge fund, was losing big money in July, few of its investors realized how bad things were getting. Then they received a letter, on July 27, and another on July 30, describing how Sowood's two key funds had lost more than 50% in just a few weeks and were winding down.

"We are very sorry this has happened," Jeffrey Larson, Sowood's founder, wrote to his investors. "A loss of this magnitude in such a short period is as devastating to us as it is to you."


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## drillinto (25 August 2007)

Beware Bailouts

by James Surowiecki / The New Yorker
August, 2007 

Real Estate In August of 1998, disaster loomed for the U.S. economy. Panic among investors after Russia defaulted on its sovereign bonds led to plummeting stock prices and a freeze on global credit markets. The hedge fund Long-Term Capital Management saw its multibillion-dollar portfolio evaporate in days, and investors pulled their money from any asset that had even a tinge of risk. But then the Federal Reserve came to the rescue, slashing interest rates three times in the space of a few weeks and pouring huge amounts of cash into the financial system. The stock market rebounded, and the economy boomed. Early the next year, Time put the Fed chairman, Alan Greenspan, on its cover, along with the Treasury officers Robert Rubin and Larry Summers, with the headline “The Committee to Save the World.”

Nine years later, it’s been another terrible August on Wall Street. The meltdown of the market in subprime loans, which over the past six months has led to the shuttering of many home lenders and mortgage brokers, has spilled over into the broader credit market. Bankers and bondholders are demanding very high interest rates for risky loans and, in some cases, refusing to lend money at all. Hedge funds and brokerages that invested in subprime securities have found themselves stuck with billions in assets that no one wants to buy, while, in the past month, panicked investors have sent the stock market down almost ten per cent. As anxiety over a global credit crunch spread, Wall Street implored an apparently reluctant Fed to rescue investors once again. And, last Friday, that’s exactly what it did, cutting the discount rate””the rate at which it lends to banks””by half a point. In response, investors sent the stock market soaring.

For anyone with a 401(k), it was hard not to greet the Fed’s move with relief. But the short-term relief comes with a long-term cost. Money managers created the current turmoil by failing to take risk seriously, enabling borrowers with sketchy credit records to borrow money nearly as cheaply as blue-chip companies. In the past weeks, managers had been paying for their folly. The Fed’s decision to flood the system with cheap money will create a textbook case of what’s usually called moral hazard: insulating fund managers from the consequences of their errors will encourage similarly risky bets in the future.

Now, you can take a fear of moral hazard, and a desire to see foolishness punished, too far. In times of real crisis, we don’t want the Fed to follow the advice that Herbert Hoover says he got from Andrew Mellon during the Great Depression: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . Purge the rottenness out of the system.” When the health of the U.S. economy is under serious threat, the Fed should act. But in this case it’s far from clear that the turmoil was an actual menace to the underlying economy of the U.S. Bailing out hedge-fund managers was great for Wall Street, but it may not have been such a good deal for Main Street.

Wall Street so dominates our image of the U.S. economy these days that it’s easy to assume that what’s bad for the Street must be bad for everyone else. But, while it’s true that a complete market meltdown would have disastrous effects on the economy as a whole, market downturns like those of the past few weeks often have only a small effect on businesses and consumers. In part, that’s because much of what happens on Wall Street consists of the shuffling of assets among various well-heeled players, rather than anything that’s fundamental to the smooth functioning of the U.S. economy. (The economy did fine before the advent of hedge funds and private-equity funds, and would probably do fine in their absence.) Similarly, while stock-market tumbles are always painful, they have no concrete impact on most American consumers, who own little or no stock. (In any case, the S. & P. 500 is still up ten per cent over the past year, which hardly suggests imminent disaster.) And, in the short run, they’re irrelevant to most corporations, too, since few companies actually use the stock market to raise capital.

The bond and loan markets do, of course, matter quite a bit to companies and to individuals, because no economy can run without a steady supply of credit. But, although standards for corporate lending have tightened in recent weeks, and interest rates on corporate bonds may have risen steadily, they’re still low by historical standards, while the rates for most traditional mortgages have barely risen. That may be why the economy as a whole shows few signs of imminent doom. Corporate profits continue to go up. Unemployment is still relatively low, and wages in the last quarter rose at a surprisingly fast rate. Likewise, in July, retail sales were healthier than expected, and industrial production was reasonably brisk.

That’s not to say that the economy has suffered no fallout from the subprime collapse. The fall in housing prices, the drying up of new construction, and the sharp rise in foreclosures in many areas are having a serious impact on employment and economic growth. But these are not problems that the Fed’s action will solve. Cutting the discount rate is not going to help subprime borrowers get new loans, nor will it get the housing market moving again. What it will do is reassure investors and save some money managers from well-deserved oblivion. It may be that the risk of a full-fledged credit crunch was high enough to make this worth doing. But there is something unseemly about watching the avatars of free-market capitalism rely on the government to pay for their bad bets. And there is something scary about contemplating the even bigger bets they’ll make in the future if they know that the Fed is there to bail them out.


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## julius (27 August 2007)

*Re: Australian Hedge Funds*

Does anyone have any information regarding Australian based hedge funds? Small or large scale.

Much appreciated.


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## drillinto (12 September 2007)

Borowitz Special for ASF Members
Andy Borowitz / September 11, 2007
[Andy Borowitz is an US comedian and satirist]
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Hedge Fund Managers March on Washington Largest Chauffeur-Driven Protest in Capital’s History Demanding further intervention from the Federal Reserve to protect their endangered fortunes, thousands of the nation’s leading hedge fund managers marched on Washington today. 

Dubbed “The Million Mercedes March,” the protest was said to be the largest chauffeur-driven demonstration in the capital’s history. 

Limousines started jamming the streets of Washington at approximately ten in the morning as irate hedge fund owners converged in front of the Federal Reserve building to demand stronger action to protect their imperiled riches. 

Chanting “No Rate Cut, No Peace,” the furious money managers were pepper-sprayed by police as their protest threatened to take a violent turn. 

Tracy Klujian, a hedge fund manager from Greenwich, Connecticut, said that simmering anger in the hedge fund community was “a powder keg” waiting to explode. 

“We have yet to see the ripple effects of this crisis,” Mr. Klujian said. “When these guys have to freeze their trophy wives’ shopping allowances, there’s going to be hell to pay.” 

Mr. Klujian’s words seemed almost prophetic as a mob of angry trophy wives looted a Ralph Lauren boutique in East Hampton, New York later in the day, stripping the establishment of its entire fall collection. 

If the Fed fails to intervene, Mr. Klujian warned, an ugly situation among the nation’s wealthiest money managers will only get uglier. 

“A lot of these guys are mad as hell right now,” he said. “But wait until they’re down to their last billion.” 

Elsewhere, FEMA announced that it would commemorate the second anniversary of Hurricane Katrina by returning phone calls from 2005.


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## drillinto (12 October 2007)

Traders claim hedge fund made them take hormones
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TRADING PLACES 
By PAUL THARP and RODDY BOYD 
New York Post, October 11, 2007

One of the world's richest and most secretive hedge funds is telling its traders to swallow female hormones to trade better, a lawsuit claims. 
The bizarre twist on how to get wealthy fast swept across Wall Street's trading desks amid ribald laughter and groans after revelations yesterday of the shocking claims involving SAC Capital. 

The firm, a powerful $10 billion hedge fund, is run by superstar trader Steven A. Cohen, one of Wall Street's most prolific players who regularly takes home $500 million a year. 

It was alleged that one of Cohen's top bosses at SAC chided traders for being too aggressive - and that they must use a soft feminine touch to score in their trading pitches. 

One junior trader claimed that the boss, Ping Jiang, a key producer at the big hedge fund, demanded that the young trader take female hormone pills to help erase his aggressive male ways so he could be more effeminate in his trading style. 

Eventually, the hormones caused the junior trader to start wearing dresses, avoid his wife's touches altogether and allegedly begin a sexual relationship with his boss, the trader claims. 

Details of the case, disclosed yesterday by Charlie Gasparino on CNBC, claimed that the boss bragged he had developed a successful trading method based on being effeminate and that other traders ought to start using it, too. 

The method apparently worked for Jiang, who's listed by Trader Monthly magazine as one of Wall Street's top 100 traders, with estimated income of $100 million a year. 

The junior trader, identified as Andrew Z. Tong, 37, filed a sexual harassment case against his boss, said CNBC. The case claimed the hormone pills wrecked his life, and also made him impotent with his wife, who wanted to have a baby. 

Tong said that when he was instructed by Jiang to start taking an unspecified dosage of the pills to improve his trading, Tong had to search the illegal black market to find his hormone pills, the report said. 

According to a court filing, Tong and Jiang met in 1998 as traders at Lehman Brothers. Tong left after three years but stayed in touch. 

Although Tong sued his boss in New York State Supreme Court hoping to get publicity, a judge sealed the papers and transferred the weird tale to arbitration where both sides would slug it out privately, the report said. Tong was hired at a base salary of $250,000. 

The judge also canceled oral arguments that had been set for today after Tong's lawyers appealed for a gag on any public discussion of the case. The judge agreed that the weird tale was too salacious for the public to hear. CNBC didn't say how it obtained the allegations in the case. 

SAC Capital and Jiang both denied the charges. 

"SAC conducted a thorough investigation and found these scurrilous accusations to be false," they said in a statement. "We will vigorously defend ourselves and are confident that these claims will be swiftly rejected in arbitration. 

The CNBC report said Tong was terminated by SAC in April 2006 after working there for a year. 

Sources close to the firm said he was fired for cause, but others claimed Tong was forced out of the firm after his complaints.


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## drillinto (14 February 2008)

New York Times, February 12, 2008

Bad Bets and Accounting Flaws Bring Staggering Losses 
By JENNY ANDERSON

Mark S. Fishman was a modern prince of the markets ”” a pedigreed money manager who raised billions of dollars at the height of the hedge fund boom. 

But last week his dream collapsed. Hobbled by bad trades in the credit markets, Mr. Fishman began to shut the fund he helped found, Sailfish Capital Partners, which oversaw $2 billion just six months ago, investors said. 

On Monday Mr. Fishman, 47, sat in the paneled Princeton Club of New York, explaining what it was like to battle the markets ”” and lose. 

“It feels like someone has died,” Mr. Fishman said, his eyes welling up. “We’ve disappointed people, and there is no one more disappointed than me.”

Mr. Fishman is not the first hedge fund manager to run into trouble ”” and he certainly will not be the last. After years of explosive growth, this secretive, sometimes volatile corner of the financial world is entering a dangerous new era. The running turmoil in the markets is stirring fears that more of these funds will fail, some, perhaps, spectacularly. 

“This will be the year with the highest number of hedge fund failures given the huge number of new and untested hedge funds,” said Bradley H. Alford, founder of the Atlanta-based Alpha Capital Management, an investment advisory business. 

“Last year there were some easy trades: short financials, short subprime, long non-U.S and emerging markets. This year there’s no clear trend and no safe place to hide.” So far few funds have suffered the same fate as Sailfish Capital. But the signs are troubling. The average stock-picking hedge fund sank 4.1 percent in January. While that tumble was not as steep as the one taken by the broad stock market ”” the Standard & Poor’s 500-stock index was down 6 percent ”” it nonetheless represented the hedge fund industry’s worst showing since November 2000. Few of the investment strategies employed by these funds made money. 

Big-name funds are suffering. David Slager and Timothy R. Barakett, who run the Atticus European Fund, lost more than 13 percent, and Lee Ainslie, who heads Maverick Capital, lost 9 percent through Jan. 25, according to SYZ & Company, which tallies hedge fund returns. (Compare that with 2007 performance when the funds returned 27.7 percent and 26.9 percent, respectively.) 

Even Goldman Sachs, which turned out record profit last year while many other Wall Street banks stumbled, is struggling to make money for its hedge fund investors. Its $7 billion Goldman Sachs Investment Partners fund, started on Jan. 1, fell 6 percent last month. 

Press officers for Atticus and Goldman declined to comment. A spokesman for Maverick could not be reached. 

“People who have been in business for 20 years are saying January was one of the most difficult and challenging times they have ever seen,” said a manager who oversees a fund of hedge funds, who asked not to be identified because he does business with many managers. 

It is a remarkable turnabout for an industry that upended the old order on Wall Street and, in the process, redefined Americans’ notions of wealth. In recent years hedge fund money has driven up prices of everything from New York apartments to Andy Warhol paintings and reshaped the worlds of philanthropy and politics. 

Managing a hedge fund has become the running dream on Wall Street. Since 2000, the number of funds has more than doubled, to 10,000. These private pools of capital now sit atop almost $1.9 trillion in assets.

Until recently, times in the industry were good, very good. On average, so-called long/short hedge funds ”” those that bet on some stocks and against others ”” returned 10.51 percent in 2007, according to Hedge Fund Research. The Standard & Poor’s 500, by contrast, returned a mere 5.49 percent, including dividends. 

But making money is getting tougher. Many hedge funds are products of a bull market. Many profited by making leveraged bets on what were, until recently, steadily rising markets. Some plowed into emerging markets while others dove into the loan market. But now, as the credit squeeze tightens and talk of recession grows louder, those same markets have collapsed.

Sol Waksman, president of Barclay Group, an alternative investment database, said that three-quarters of the 1,241 hedge funds that have reported returns for January lost money.

“That’s a scary number,” Mr. Waksman said. 

Many managers fear things will only get worse. The mood was bleak at a hedge fund conference given by Morgan Stanley recently at the Breakers resort in Palm Beach, Fla., according to people at the gathering. 

Larry Robbins, the founder of Glenview Capital, a $9 billion hedge fund, captured the atmosphere of the conference, entitled, “2008 and Beyond,” with a bit of black humor. Asked what his strategy was for 2008, Mr. Robbins joked, “To get to, ‘and beyond,’ ” according to a person at the meeting. Mr. Robbins declined to comment. 

Sailfish seemed like a hedge fund that might weather the storm. Before founding the fund, Mr. Fishman spent seven years working for Steven A. Cohen, the founder of SAC Capital Advisors, another hedge fund based in Stamford, Conn. Mr. Fishman called Mr. Cohen the “Michael Jordan” of the trading world. 

Mr. Fishman and Sal Naro, a friend who worked at UBS, formed Sailfish in 2005, aiming to “build a better mousetrap,” Mr. Fishman said. The firm’s name is a play on their names. 

The pair, both fixed-income specialists, quickly raised $1 billion for their flagship multi-strategy fixed-income fund, according to investor documents. Assets grew steadily, reaching $1.2 billion by the end of 2005 and $1.5 billion by the end of 2006, when the fund returned more than 12 percent. In July, the fund sat atop almost $2 billion, and exhibited relatively low volatility ”” a key factor for institutional investors.

But July proved treacherous. As the credit markets seized up, Sailfish owned seemingly safe top-rated investments, including mortgage investments, that suddenly plummeted in value. 

“We are working exceedingly hard in an illiquid market to position the portfolio in a way that can withstand these conditions and enable us to participate aggressively as the market stabilizes,” Sailfish wrote to investors in August. The fund lost 12.5 percent that month. 

“Wall Street was not willing to make orderly markets for high- quality short-dated paper,” Mr. Fishman recalled on Monday. “They didn’t know their own balance sheets.” (Banks have taken more than $200 billion in hits since August.)

Sailfish bounced back in September and October, but investors, alarmed by the deteriorating markets, began to take their money out of the fund. By the end of the year, Sailfish was down more than 15 percent. In January, it fell an additional 7 percent.

Last Thursday, Sailfish started to alert investors that the fund was likely to shut down, two investors said. Mr. Fishman visited investors in Chicago and California, these investors said, while Mr. Naro met with investors in New York. The fund met all its margin calls and has ample cash, said one investor who spoke with one of the principals. Neither of the fund managers would confirm that the fund was closing.

But Mr. Fishman will say what it is like to lose mony for investors ””including himself.

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


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## drillinto (10 January 2009)

The Ponzi Scheme in every hedge fund:

http://www.time.com/time/business/article/0,8599,1869196,00.html?xid=rss-topstories


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## drillinto (17 January 2009)

Hedge-fund assets fell 48% last year

http://www.bloomberg.com/apps/news?pid=20601087&sid=a82lfTLU_wUg&refer=home


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## Wysiwyg (5 March 2016)

How's this fund manager. Racked up top returns but got knocked out cold a few times having to close business and mortgage house and pawn silver in 1998. Even tried suing CME for allegedly betting against him. That doesn't happen does it.  Then the GFC which prolly got most traders in some way. System broke. 


*Victor Niederhoffer*

Returns

Niederhoffer Investments returned 35% a year from inception through 1996, when MAR ranked it the No. 1 hedge fund manager in the world. In 1997, Niederhoffer published a New York Times bestselling book, The Education of a Speculator.

In statistical terms, I figure I have traded about 2 million contracts, with an average profit of $70 per contract (after slippage of perhaps $20). This average is approximately 700 standard deviations away from randomness.

1997 losses

In 1997, Niederhoffer Investments was not finding many opportunities for investments and, having returned much of its funds to customers such as George Soros, began investing the remaining 100 million dollars in areas where Niederhoffer later admitted that he did not have much expertise.[6] Niederhoffer decided to buy Thai bank stocks, which had fallen heavily in the Asian financial crisis, his bet being that the Thai government would not allow these companies to go out of business. On October 27, 1997, losses resulting from this investment, combined with a 554-point (7.2%) single day decline in the Dow Jones Industrial Average (the eighth largest point decline to date in index history), forced Niederhoffer Investments to close its doors. In a lawsuit that Niederhoffer later filed in the U.S. District Court for the Northern District of Illinois against the Chicago Mercantile Exchange, where he traded options, he alleged that floor traders colluded to drive the market down that day to force him out of his positions. Traders at the time said Refco may have been responsible for as much as $35 million of Niederhoffer's losses.

New fund

Since closing down his fund in 1997, he began trading for his own account again in 1998, after mortgaging his house and selling his antique silver collection. This original fund is called Wimbledon Fund, the name reflecting his love of tennis. He began managing money for offshore clients in February 2002, with the Matador Fund. Niederhoffer employs proprietary programs that predict short-term moves using multivariate time series analysis. *In a five-year period beginning in 2001, Niederhoffer's fund returned 50% a year (compounded). His worst year in this period was 2004, returning 40%. In 2005, he returned 56.2% *(as reported in eFinancial News). On April 6, 2006, the industry group MarHedge awarded Matador Fund Ltd. and Manchester Trading, two funds managed by Niederhoffer, the prize for best performance by a commodity trading advisor (CTA) in the two years 2004 and 2005.

However, Niederhoffer's funds were caught up in the 2007 subprime mortgage financial crisis, and the Matador Fund was closed in September 2007 after a decline in value of more than seventy-five percent.


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## luutzu (6 March 2016)

So lesson number one is: Unless you personally know the manager and understand what he is doing (just you can't be bothered because you're too busy and he updates you once a week anyway), the safest place for your money is either under the mattress, at the bank or you managing it.

Why people would trust strangers to look after their money is beyond me. I mean, these are hedge fund managers, not your doctor or lawyer whom you can always trust.


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