Just thinking …

Now that we know that Bernie Madoff’s returns were fictitious, should we expect to see other “hedge funds” exposed? They all claimed to be making huge returns :20% or more, year after year, and I never questioned that (nor did I invest in them, which probably explains my lack of curiosity). But maybe not all those thousands of funds were actually making what they said they were – maybe, like Bernie, they were making it all up. As is now obvious, no one was checking up on them. This could get interesting.

2 Comments

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2 responses to “Just thinking …

  1. Riverside Dog Walker

    If a reputable prime broker is involved, it is pretty much a given that there is real trading going on. The PB’s have the positions on their books. Since a hedge fund uses leverage to get the returns you mention, the PB’s are on top of margin requirements.

    I would still expect to see 1/3 or so of all ‘hedge funds’ disappear in this environment. ‘Hedge fund’ has come to represent a corporate and fee structure, more than anything else. The only funds that are truly hedged against downside risk typically use strategies such as convertible arb and risk arb, neither of which is as profitable as it used to be for lots of reasons.

    The simple fact is that it is really hard to make money in a down market and the ‘hedge funds’ which can’t make their numbers will be punished by their investors. Not to mention that if you have negative performance, then you don’t get your 20% incentive fee, which is where the real money is. You can’t pay staff, they leave. You also have to typically make up your losses before you can once again charge your clients incentive fees (the high water mark).

    Maybe time to call the Antares boys and see how the UST building is going……

  2. Vicky

    I have no doubt that many hedge funds are melting away as we speak, and that many unpleasant surprises are in store … and I’m just talking about the ones that have NOT done anything fraudulent!

    Hedge funds are not required to report their performance to any regulatory authority. If and when they make their performance known to the public, it’s because they want to, not because they have to.

    Case in point: good ‘ole Long Term Capital Management did not provide its performance information to the industry data bases from October 1997 to October 1998, a stretch when it lost something like 90%.

    So anything you read about hedge fund performance must be taken with many grains of salt. I keep reading that the “average” hedge fund is down 15 to 20% this year, but given the voluntary nature of the reporting, there’s no reason to think that’s an accurate picture; the overall performance is probably far worse.