http://www.iht.com/articles/2008/04/07/business/rtrcol08.php Hedge funds are ready to set records this year, but their achievements are not the stuff that managers or investors want to brag about.
"The bubble has popped, and there is going to be a lot of pain," said Bradley Alford, the founder of Alpha Capital Management, a hedge fund advisory firm. "There will be a massive reassessment of where money should go."
Until recently, this was a red-hot industry known for its double-digit returns, money pouring in and billion-dollar paychecks. But amid terrible returns, more and more companies are now facing investors asking for their money back as staffs worry whether there will be another paycheck.
As pressure from poor returns and redemptions builds, more funds than ever will be forced to liquidate, investors said. Many expect the $1.8 trillion industry's estimated 10,000 funds to be winnowed down by a few thousand in a few years.
"This year is going to be really ugly," said one manager, who did not want to be identified because his investors did not know yet about his double-digit losses. "One day you are off 2 percent and, before you blink, you are down 20 percent. This year is just unpredictable and crazy."
Tallying the wreckage of the first quarter, including the collapse of the hedge funds Peloton Partners and Sailfish, investors agree things will get worse before they improve.
They are not much more optimistic about the private equity industry, where deals requiring big debt financings are getting done less often.
"At this point, when the liquidity spigot is turned off pretty much, its a brave new world and one in which the private equity game rules have changed dramatically," said Michael Holland, chairman of the private investment firm Holland and a former partner at Blackstone.
Mounting job losses coupled with the deepening housing crisis may have already pushed the U.S. economy into recession and certainly have frightened Wall Street banks into lending less to hedge funds. For many managers, borrowed money, or leverage, was the lifeblood for strong returns. With those gone, analysts expect investors may be tempted to put their money with managers who charge less than hedge funds' hefty fees.
In the face of sagging returns, the new trend in hedge funds will not be how much they pull in, but trying to stop the money that they have from fleeing, investors and managers said.
In February, investors sent only $8.4 billion to hedge funds after adding nearly three times that amount in November, according to data from research firm TrimTabs.
"Hedge funds are going to become the kind of hotels where you can check in, but you can't check out," Alford of Alpha Capital said, explaining that managers are desperately adding restrictions to keep all the money from leaving at once.
Hedge fund investors and managers will be discussing these topics next week at the Reuters Hedge Fund and Private Equity Summit in New York, London, Singapore, Hong Kong and Tokyo.
Managers are right to fear outflows, as industry analysts forecast the average hedge fund probably lost between 5 percent and 8 percent in the first quarter.
Those numbers will be released in a few days, but because hedge funds, unlike mutual funds, report returns only voluntarily, the data may paint a misleading picture. Failed hedge funds' heavy losses are no longer counted and losing managers often do not report either, skewing the data.
Some of the industry's biggest names are among the losers so far in 2008.
Tudor Investment Group's $4.3 billion Raptor fund lost 5.3 percent through the middle of March, with its assets now half what they were last summer. Barton Biggs' Traxis Fund tumbled 13.8 percent through the middle of March. And Och-Ziff, one of the few publicly traded hedge funds, said its funds were also down in the first quarter.
Losses loom larger still at many less prominent funds that specialize in Asian securities and emerging markets.
But some managers see a silver lining for hedge funds amid the crumbling markets.
"Ultimately, we believe the liquidity crisis will migrate not only within North American markets, but broadly among international geographies, as well, presenting opportunities for investors capable of chasing liquidity on a global basis," the hedge fund firm D.B. Zwirn told investors last month.
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"The bubble has popped, and there is going to be a lot of pain," said Bradley Alford, the founder of Alpha Capital Management, a hedge fund advisory firm. "There will be a massive reassessment of where money should go."
