If hedge funds are “heading for the rocks”, it’s to rescue long-only castaways
Oct 2nd, 2008 | Filed under: Media Coverage of Hedge Funds, Today's PostIt’s becoming difficult to tell whether the mass hysteria surrounding hedge funds this month is driven by reality or schadenfreude. There is little doubt that some high profile hedge funds will experience some redemptions this week. But today alone, we saw the hedge fund industry being described as a “horror show”, a “hellfire” and a “bloodbath” that is “heading for the rocks“. We heard about “investors pounding on the doors to get out”. We were warned by experts that there is “smoke billowing from Greenwich” and that the “suffering will be profound”.
While this is great copy, it simplifies the hedge fund industry in the same way that talk of hedge fund managers all buying yachts was de rigueur only a few years ago. Less widely reported was that hundreds of hedge funds closed up shop every year during those Halcyon days. And less widely reported today is that fact that many funds are thriving in today’s environment (and not just the mega-short funds like Paulson & Co.). The high dispersion of hedge funds illustrates their attractive quality – idiosyncractic risk. In aggregate, hedge funds are down around 10% YTD. But recent reports suggest that over half of hedge funds were reporting positive YTD returns right up to the end of August.
It’s becoming a knee-jerk reaction to warn of the perils of hedge fund leverage. Some estimates suggest the $2 trillion hedge fund industry had amassed up to $600 billion in cash by the end of September in preparation, some hypothesize, for quarter-end redemptions. This dramatic de-leveraging has also been picked up by various measures of leverage (see related posts).
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