Tweet
Fascinating article in by Bethany McLean in Vanity Fair. It's a an interesting mix of broad sweep analysis of the hedge fund world and a focus on a small number of specific hedge funds.
What's mind-boggling is just how much money the hedge funds managers made in the last 8 years and just how bad things are now for the funds (i.e. fund clients).
She wrote the "Smartest Guys in the Room" on Enron.
Some tidbits:
"
.....As the investment banks that provided the debt began to fight for their own survival, those hedge funds that depended on it were faced with margin calls. But even funds that weren’t debt-laden were hit with problems from the banking panic. To reduce their risk, many funds began to sell their positions and move to cash. For example, the stock holdings of Atticus Capital, whose co-chairman is Nathaniel Rothschild, fell from $8.1 billion at the end of June to just $510 million by the end of September. In addition, just as you wouldn’t want your money at a bank that goes under, hedge funds didn’t want to be trapped at a firm that went under, so they moved their money to banks they thought were safer. In order to do so, they had to sell their long positions and get out of the short positions, driving down the price of the former and driving up the price of the latter—thereby exacerbating the selling pressure.
In a way, hedge funds were eating one another alive. As managers sold their positions, some discovered, as one manager puts it, that “all our names were owned by the same guys. We had become the market. When I ran for the exits, all the buyers who should have been there were doing the same.” During the third quarter, a Goldman Sachs index which tracks stocks that are heavily owned by hedge funds lost 19 percent, more than twice the decline of the S&P 500, while another Goldman Sachs index that tracks stocks which hedge funds were likely to sell short actually gained 2.4 percent, according to a Cambridge Associates LLC report. “Hedge funds were shooting at each other,” says one manager, meaning that some funds would make bets against stocks that were heavily owned by other managers.
And then there was the September 2008 bankruptcy of Lehman Brothers. Not only did that roil the market further—it caused a particular problem for hedge funds. Because the U.S. actually has fairly strict rules about the amount of debt you can use, many funds had set up offshore accounts—sometimes with Lehman London—where the rules were far laxer. What they failed to understand was that bankruptcy rules are also different in London, and that they wouldn’t be able to get their money out. One manager estimates that roughly half of the hedge funds in existence had at least some exposure to Lehman London.....
Other hedge-fund managers who do not employ gating (refusing to give clients their money back on demand) are outraged, in part because the practice has hurt them. “It is the stupidest thing I have ever seen my industry do,” says Jim Chanos, who runs a well-known hedge-fund firm called Kynikos Associates, which specializes in short-selling. “It’s given rise to the worst fears—that hedge funds are a roach motel.” He also says that, while his fund was up more than 50 percent last year, he has gotten redemption requests for 20 percent of his assets—not because investors want to cash out, but because they can’t get money anywhere else. “I am an A.T.M. machine,” he says, in a comment that was repeated to me by many other managers...
"
http://www.vanityfair.com/politics/f...urrentPage=all
What's mind-boggling is just how much money the hedge funds managers made in the last 8 years and just how bad things are now for the funds (i.e. fund clients).
She wrote the "Smartest Guys in the Room" on Enron.
Some tidbits:
"
.....As the investment banks that provided the debt began to fight for their own survival, those hedge funds that depended on it were faced with margin calls. But even funds that weren’t debt-laden were hit with problems from the banking panic. To reduce their risk, many funds began to sell their positions and move to cash. For example, the stock holdings of Atticus Capital, whose co-chairman is Nathaniel Rothschild, fell from $8.1 billion at the end of June to just $510 million by the end of September. In addition, just as you wouldn’t want your money at a bank that goes under, hedge funds didn’t want to be trapped at a firm that went under, so they moved their money to banks they thought were safer. In order to do so, they had to sell their long positions and get out of the short positions, driving down the price of the former and driving up the price of the latter—thereby exacerbating the selling pressure.
In a way, hedge funds were eating one another alive. As managers sold their positions, some discovered, as one manager puts it, that “all our names were owned by the same guys. We had become the market. When I ran for the exits, all the buyers who should have been there were doing the same.” During the third quarter, a Goldman Sachs index which tracks stocks that are heavily owned by hedge funds lost 19 percent, more than twice the decline of the S&P 500, while another Goldman Sachs index that tracks stocks which hedge funds were likely to sell short actually gained 2.4 percent, according to a Cambridge Associates LLC report. “Hedge funds were shooting at each other,” says one manager, meaning that some funds would make bets against stocks that were heavily owned by other managers.
And then there was the September 2008 bankruptcy of Lehman Brothers. Not only did that roil the market further—it caused a particular problem for hedge funds. Because the U.S. actually has fairly strict rules about the amount of debt you can use, many funds had set up offshore accounts—sometimes with Lehman London—where the rules were far laxer. What they failed to understand was that bankruptcy rules are also different in London, and that they wouldn’t be able to get their money out. One manager estimates that roughly half of the hedge funds in existence had at least some exposure to Lehman London.....
Other hedge-fund managers who do not employ gating (refusing to give clients their money back on demand) are outraged, in part because the practice has hurt them. “It is the stupidest thing I have ever seen my industry do,” says Jim Chanos, who runs a well-known hedge-fund firm called Kynikos Associates, which specializes in short-selling. “It’s given rise to the worst fears—that hedge funds are a roach motel.” He also says that, while his fund was up more than 50 percent last year, he has gotten redemption requests for 20 percent of his assets—not because investors want to cash out, but because they can’t get money anywhere else. “I am an A.T.M. machine,” he says, in a comment that was repeated to me by many other managers...
"
http://www.vanityfair.com/politics/f...urrentPage=all