Hedge Funds Continuing to Take It on the Chin

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Hedge Funds Continuing to Take It on the Chin

We've remarked from time to time this year that a lot of hedge funds aren't having a particularly good time these days. The volatility that has punished mere mortals has also taken a toll on many Masters of the Universe.

The Wall Street gives an update, showing that even some of the biggest names have been bloodied. The most interesting development is that investors are starting to negotiate fees, a development observers and participants swore would never happen.

I also recall in the 1980s, when all credit cards had an annual fee and charged the legal maximum on balances (I believe 19.8%; banks could and did shop jurisdiction), experts insisted they'd never, NEVER cut prices either.

From the Wall Street Journal:

    Some of the biggest hedge funds are having their worst years, and the flood of new money going into funds has slowed. That is pressuring an industry bracing for investor withdrawals and worrying about how to survive without lucrative performance fees.

    Some investors willing to put new money in funds are even beginning to ask about better terms, a contrast to the situation just last year, when investors needed to beg to get into hot funds.



    Big funds run by star investors, such as Steve Mandel's Lone Pine Capital, Dinakar Singh's TPG-Axon Capital Management, Tim Barakett's Atticus Capital and Tom Steyer's Farralon Capital, have lost between 7% and 25% so far this year, investors say. Ken Griffin's biggest fund at Citadel Investments is down 6% this year, its worst performance in 14 years.

    Overall, hedge funds -- private partnerships that invest money for wealthy investors and institutions -- are having their worst year since at least 1990, the year that Hedge Fund Research Inc. began tracking the data. The average fund lost 3.43% this year through July, faring better than the decline of 12.65% in the Standard & Poor's 500 but below the gain of 1.05% in the Lehman Brothers bond index. August data haven't been calculated yet.

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UBS: UK Banks May Have Used ?200 Billion in Emergency Funds

UBS analyst Alistair Ryan has taken a stab at the level of use by British banks of the governments' emergency facilities. His estimate, that it may total ?200 billion or perhaps even higher.

To put it in context: the UK's GDP is roughly $2.8 trillion. The US economy is a bit under $14 trillion, or nearly 5 times bigger (note that on a purchasing power parity basis, the size difference is even greater, over six times). If you use an exchange rate of $1.8 = ?1, that ?200 billion is equal to $360 billion. The support to the banking system is roughly 75% of the size of the usage made of the Fed's facilities (remember, some like the PCDF, vary a lot over time, while the TAF seems to be fully subscribed) for an economy 20% as large.

Ryan's estimates may simply be too high. But even if he is off by 100%, British banks are making far heavier use of life support than their US counterparts.

From the Telegraph:
Troubled lenders in the UK may have tapped the Bank of England's emergency funding scheme for as much as ?200bn,

    according to investment bank UBS - double the most aggressive estimates.

    Alastair Ryan, UBS banks analyst, has calculated that "the take-up could be ?200bn or more".

    When Bank Governor Mervyn King first unveiled the Special Liquidity Scheme in April he indicated that it might be used for ?50bn, while debt specialists forecast a total take-up of ?90bn-?100bn by the time the scheme closed on October 20.

    A Bank spokesman said yesterday: "As has always been the case, there is no cap on the scheme. Its size will reflect its use."

    The scheme, which allows banks to swap untradeable mortgage securities for liquid Treasury bills for up to three years, has filled the funding hole left by the closure of the wholesale markets since the credit crisis. The last major syndication of mortgage securities was in June last year.

    Mr Ryan believes banks are using the scheme to replace maturing funding lines, as well as to fund future lending and past lending that would normally have already been syndicated.

    Such action would tally with assertions by Sir James Crosby in his recent mortgage report for the Treasury that "the shortage of mortgage finance will persist throughout 2008, 2009 and 2010" and that banks must find ?40bn a year to meet their existing obligations before making any new loans....

    The Bank for International Settlements on Monday revealed that UK lenders issued a record ?45bn of mortgage-backed bonds in the three months to June in order to use the scheme.....

    Bankers and economists were surprised by the forecast, calling it "unlikely but plausible".

[rickortreat]

After they stopped hedge funds from cheating by buying mutual funds before they changed prices for the day, they started to have to think a little to make money.  Apparently, some of them have no idea how to trade whatsoever, since loosing money is a very bad thing, and at the very least you should be close to even at the worst.

It's tough to be consistently good in the markets, as their character goes through different cycles, depending on it's own rhythms and inputs from the government, investors, speculators and business, as well as weather and crop reports.  Strategies that work well in some environments do not in others. 

Currently, the stock market is still chopping, going up and down in fairly large price swings.  For investors, this type of price action does nothing, the average price is still there.  IMO, the market is headed for lower levels, the Indu's shouldn't be able to get much higher than 11750, with a downside target for 9500 still in effect.

The market is in a consolidation pattern that has yet to resolve.  For day traders that doesn't matter, this market presents great opportunities for people who can watch charts all day.

Hedge funds can't be as nimble as a single trader, when they take a position, it's a big one, because of all the money they have. Their size helps them to control the market, but it also requires skill, since selling a lot at the same time can push the price down.  It isn't always easy to exit a large position in the market, and without some skill in that area, size can be a liability. Even when establishing a position, buying to much too soon can put the price up on yourself.  I would say that this particular market is not friendly to their abilities. I wonder how many of them are public, since their stocks would be ripe targets.