“Trouble is bubbling up for two more hedge funds. First, hot on the heels of Amaranth Advisors meltdown…”

Institutional Investor’s “Daily ii” reports on a couple of “troubled” hedge funds.  But although they are compared to Amaranth, which lost a king’s ransom, neither fund actually lost that much money for investors.  In fact, the only ones who lost their shirts at these funds would have been the very people that made the most on the way up: the owners of the respective firms.

Firstly, Daily ii cites a story in the New York Times about Archeus Capital, a convert arb fund that went from $3b AUM to $700M AUM and will be giving the rest of the money back to investors by the end of the year.  The paper goes to great lengths to conjure up images of another blow-up – citing Amaranth 3 times in the first 100 words. 

But Archeus, a blow up?  The fund was down 1.9%, is reportedly invested in highly liquid positions, and will apparently be able to return all remaining capital to investors in 2 months.  Bubbles invariably end in tears.  But this story ends with an orderly return of capital and minimal losses for investors. 

Second, Daily ii cites D.B. Zwirn, a multi-strategy fund that according to the New York Post, has been accused of the “questionable use of the hefty fees investors paid to it.” (note the loaded language)  Details have yet to emerge, but accounting transgressions hardly amount to an Amarath-scale debacle – even if they are indefensible.

(To this list of false “blow ups”, I might also add Canada’s Portus Alternative Asset Management – the biggest hedge fund “blow-up” in Canadian history.  For all its exorbitant costs and lapses in sales compliance, investors will still get back 85% of their initial investment.)

A gaggle of media pundits has reported recently on the “hedge fund bubble” and have drawn an implicit comparison to other bubbles – of the Internet, real estate, or tulip bulb varieties.  But flat performance, accounting irregularities & compliance issues are idiosyncratic risks found in any industry.  They cannot be held up as evidence against an entire industry or business model. 

Let’s reserve the “bubble” and “blow-up” language for, say, actual bubbles and blow-ups.