Vanity Fair on Hedge Funds

Used to be (way back when – say, 2007) if you had an MBA and a dream you could start a hedge fund, make a zillion dollars and overpay for a trophy wife and a Greenwich mansion to put her in. It’s harder now.

So far so good

Or so said the jumper as he passed the 35th floor of the Empire State Building on his way down. Hedge funds are already reporting this year’s performance and, with just a couple of exceptions, they’re all up. Tyler Durden, who compiled this report, notes that the only way the funds could be up in such a down period is if they’re busy selling short. As Phillip Blumberg, Dean of my Law School and my corporation law professor used to caution, “gentlemen, the number one cause of suicide on Wall Street is selling short.” Look out below.

Gretchen Morgenson: The end of banking as we’ve (recently) known it

Her prediction – financial services will return to the dull old boring days when the good ones traded at 1 to 1.5 X earnings  book value.  No more leveraging 30X, no more out-sized salaries and, by the way,higher interest rates. My manager tells me that our office saw a large number of house viewing appointments today so maybe buyers are ahead of those pundits who think mortgage rates are going to fall lower and stay lower.

But sellers might want to consider what will happen if the financial services jobs and multi-million dollar bonuses disappear, especially if accompanied by higher mortgage costs. Nothing good.

And hedge funds? They’re not doing so well either. These guys charged 20% of the profits they earned: no profits, no 20% and no 20% until they earn back their losses, if they ever do. Citadel’s  Kenneth Griffin, whose fund lost 55% this year, says he’s trying to stay open. “But he acknowledges that for several years, he will be working mostly for ‘psychic income.’ ”

Griffin will survive, but a lot of junior hedge funders will not be buying $4 million homes in Greenwich in the near future. Looks like the only ones who will will be Greenwich town employees.

Say, I’ve got an idea, let’s put on a show!

  Smart Greenwich kids with Harvard degrees? Astrophysicist? Let’s start a hedge fund! I think the train already left on that idea but I’m confident that we’ll eventually see a new wave of smart kids who find a new way to generate wealth. They always do, God bless them.

I’d never heard of these people and now I wish I hadn’t

Uma Thurman and Arpad Busson lose big with Madoff. Or something – the link is really to a Bloomberg story on “Arki” Busson and his bad year. I like this part:

“Catching a fraud is practically impossible,” Busson says. “There’s only so much due diligence you can do. This was not an obscure little manager in the boondocks. He seemed like a very experienced, knowledgeable, trustworthy man — like the best con artists always are.”

Busson says there’s still a role for funds of funds like his, because institutional investors find the screening and monitoring of hedge funds too time-consuming and expensive to do themselves.

Go ahead and try to square those two assertions – I can’t.

Hedge fund trouble

Prediction: 1/3 of hedge funds to disappear.  I have a client whose fund is up over 10% for the year but they’ve still suffered a withdrawal of 20% of their assets they manage, due to fear and customers who need money to pay other liabilities. If that’s what’s happening at a profitable fund, I won’t be surprised if this prediction proves accurate.

Greenwich Financial Services and the applecart?

This New York Times business blog mostly devotes itself today to assessing, with a skeptical eye, various post-bailout deals being finagled by our auto companies and such. But I was struck by this promise at the end of the column and by the follow up comment from a reader:

Countrywide

On Wednesday, I’ll write about Greenwich Financial Services’ lawsuit against Countrywide Financial seeking to forestall the modification of mortgage loans under 374 Countrywide mortgage trusts.

If Greenwich succeeds it will put a real monkey wrench in loan modification programs. –Steven M. Davidoff

December 2nd,
2008
3:18 pm

There is absolutely no excuse for the Times not putting the story of the lawsuit by Greenwich Financial Services against Countrywide on the front page.
This cracks open the entire securitization game. It is incendiary, to say the least that, because of the practice of bundling mortgages then slicing anddicing tranches of risk off those bundles, wealthy hedge fund investors are preventing mortgage relief.
If the majority of the general public understood this, heads would roll. Why is the Times burying this?

I’m pretty sure that the head of Greenwich Financial Services is the same guy who was (unjustifiably) ripped by some posturing Congressman a few weeks back for insisting that our Constitution prohibits the government from interfering with contracts between private parties (it does). But I’ll go look into it now.

UPDATE: The story’s here. It’s pretty much what I said – Countrywide, bowing to states Attorney Generals and Congress, has agreed to modify some 400,000 mortgages that are in default or threaten to go into default. GFS owns some of those mortgages or the income streams from them and says Countrywide can’t do what it wants to do. I’m with GFS but, as one lawyer quoted in the article says, “it should be interesting”. Indeed.