Thursday, January 19, 2006
A 'Recession' For 'Pricey Laggard' Funds
Business Week reports on a pull back in hedge funds. "While bubble watchers were obsessing over the housing market last summer, a soft hissing sound started emanating from the general direction of the capital markets."
"The leak was in hedge funds, a $1.1 trillion industry that had doubled since 2000. By December the air was gushing out. Net money flows into hedge funds, which are investment pools available mainly to institutional and wealthy individual investors, were down 44% in the third quarter from a year earlier, according to industry statistics. And they slowed to almost nothing in the fourth quarter."
"Chicago's Hedge Fund Research reported in December that through Sept. 30, a record 484 funds, more than 6% of the total, had shut down in 2005. Figures for the fourth quarter aren't available yet, but they're sure to be even worse, says Minneapolis hedge-fund manager Andrew Redleaf. He describes the situation as a 'recession for hedge funds,' and says things are even bleaker than the data show, because the numbers are based on unaudited results reported to industry groups."
"What went wrong for funds? In a word, performance. Standard & Poor's measure, which tracks 42 funds across nine different investing styles, gained just 2.3% in 2005, less than the 4.9% total return for the plain-vanilla S&P 500-stock index. The funds' high fees and rigid rules, coupled with the paltry returns, have been their undoing. The typical fund charges 1% to 2% of assets under management, plus 20% to 50% of any profits. Many funds also require that investors lock up their money for a long time, often a year or more, before selling. All of this was fine from 2000 to 2002, when hedge funds were beating the stock market handily. Now they're laggards, pricey laggards that are hard to get out of."
"High-profile hedge-fund blowups, including the debacle of Wood River, chronicled in these pages in October, haven't helped matters. The $450 million Bayou Group LLC turned out to be an outright fraud. Its July, 2005, closure was particularly unsettling because well-known industry consultants like the Hennessee Group had clients in the fund."
"William Bloss, a lawyer for some of Bayou's investors, says his clients don't want anything to do with hedge funds anymore. 'People are much less comfortable with this world,' says Bloss."
"The leak was in hedge funds, a $1.1 trillion industry that had doubled since 2000. By December the air was gushing out. Net money flows into hedge funds, which are investment pools available mainly to institutional and wealthy individual investors, were down 44% in the third quarter from a year earlier, according to industry statistics. And they slowed to almost nothing in the fourth quarter."
"Chicago's Hedge Fund Research reported in December that through Sept. 30, a record 484 funds, more than 6% of the total, had shut down in 2005. Figures for the fourth quarter aren't available yet, but they're sure to be even worse, says Minneapolis hedge-fund manager Andrew Redleaf. He describes the situation as a 'recession for hedge funds,' and says things are even bleaker than the data show, because the numbers are based on unaudited results reported to industry groups."
"What went wrong for funds? In a word, performance. Standard & Poor's measure, which tracks 42 funds across nine different investing styles, gained just 2.3% in 2005, less than the 4.9% total return for the plain-vanilla S&P 500-stock index. The funds' high fees and rigid rules, coupled with the paltry returns, have been their undoing. The typical fund charges 1% to 2% of assets under management, plus 20% to 50% of any profits. Many funds also require that investors lock up their money for a long time, often a year or more, before selling. All of this was fine from 2000 to 2002, when hedge funds were beating the stock market handily. Now they're laggards, pricey laggards that are hard to get out of."
"High-profile hedge-fund blowups, including the debacle of Wood River, chronicled in these pages in October, haven't helped matters. The $450 million Bayou Group LLC turned out to be an outright fraud. Its July, 2005, closure was particularly unsettling because well-known industry consultants like the Hennessee Group had clients in the fund."
"William Bloss, a lawyer for some of Bayou's investors, says his clients don't want anything to do with hedge funds anymore. 'People are much less comfortable with this world,' says Bloss."
# posted by Ben Jones @ 11:17 AM 
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Its about time the press started covering the absolute myth of "hedge fund success". Most hedge funds suck. The majority don't beat the S&P and are saddled with insane management fees. And lets not even talk about the absurdity of funds-of-funds with another layer of fees. There are even "F3's" in NY which are funds-of-funds-of-funds. What kind of dumbass thought triple management fees would ever work is beyond me, but I'm glad that there is some attention being paid to the reality of their wimpy performance. Now that the markets are on fire, I predict a disappearance of most funds. Who needs managers in a bull market?
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