Quote from flytiger:
October 1, 2008
A Squeeze on Leading Fund Chiefs
By LOUISE STORY
Lee S. Ainslie, Louis M. Bacon and Daniel Loeb are some of the most successful hedge fund managers around. But even they lost big lately as the markets turned chaotic.
Funds managed by the three money managers all lost at least 5 percent of their value in September, leaving them in an even deeper hole for the year.
While their showing was better than that of the broad stock market, it nonetheless underscored how difficult this year had been for hedge funds â and how much pain might yet lie ahead. The average fund is down 10 percent for the year, as of last Friday, according to Hedge Fund Research, and much of those losses hit in September.
The news could not come at a worse time for the $2 trillion industry, which manages money for some of the largest pension funds, endowments and foundations. Many hedge funds ask investors to provide three monthsâ notice if they would like to take their money back. And for year-end withdrawals, the deadline was this week â meaning that investors were evaluating their hedge fund holdings just as lightning struck the markets.
âSome of the selling you saw in the stock market Monday was clearly hedge fund managers selling to be ready for redemptions,â said David Salem, chief investment officer for the Investment Fund for Foundations, which invests $8 billion for charity endowments.
Mr. Salem said he did not redeem a penny this week, but he believed funds would continue to suffer as others cashed out.
On Tuesday, RAB Capital, a British fund manager reportedly froze redemptions on its fund for three years, meaning that investors could not take money out until 2011. RAB, once a high-flying fund, has lost more than 54 percent of the value in one of its funds this year and double digits in others, according to HSBC.
The credit squeeze has affected hedge funds in some of the same ways that it hit banks. And now they face new rules from the Securities and Exchange Commission about short-selling, a trading tactic that many funds use to bet against stocks.
Maverick Capital, a hedge fund in Texas run by Mr. Ainslie, lost 11.4 percent in September. That put Mr. Ainslie, a disciple of the noted investor Julian Robertson, down 13 percent for the year, according to a report from HSBC that includes data through last Friday. Mr. Ainslie did not return phone calls seeking comment.
At least three funds run by Moore Capital, which is headed by Mr. Bacon, stumbled in the last couple of weeks. A spokesman for Moore Capital declined to comment.
Third Point Offshore, led by the activist investor Mr. Loeb, was down only 1.2 percent as of Sept. 12. But over the next two weeks, it fell to a 6.6 percent loss for the month. That leaves Mr. Loeb down 13.8 percent this year.
âLook, theyâve had their hands tied behind their back,â said Dick Del Bello, senior partner of Conifer Securities, a company that provides administrative support to hedge funds. âLook at what has happened to the market in the last two weeks. And they canât play the downside?â
Many funds took their money out of the markets to try to avoid trouble. The cash-outs signal that some managers chose to lock in gains from the year, instead of taking additional risks. It also signals that some expect they will need cash on hand to pay for redemptions.
It is not only the troubled funds that could face withdrawals. Some investors may take money from funds that are performing well, simply because those funds have looser redemption policies.
âThe investors who are rushing for the exits will do so where they can, not where they want to,â said Andrew Barber, a director at Research Edge, an investment research firm in New Haven, Conn.
Hedge funds employ a wide range of investing strategies, but it was those who invest in public companies that took the toll over the last few weeks. The value fund of Fir Tree Partners lost 10 percent last month, even though it was up 2 percent in mid-September. The last two weeks left the equity hedge fund down 17.7 percent for the year as of last Friday, according to HSBC.
Paul Tudor Jonesâs Raptor Fund fell nearly 2 percent in September, putting its losses at nearly 12 percent for the year. It will be months before the impact is known from hedge fund redemptions on the markets. As investors take back their money, hedge funds sometimes must sell their positions, although they typically have months to do so.
While many investors will flee, some investors said they were willing to stick with veteran hedge fund managers.
âIt would be very unwise to conclude that someone who has been demonstrably good at managing money for years has suddenly lost their compass,â Mr. Salem said. âThe compass may just be malfunctioning in the current environment.â
