Top 15 For 2008 (No. 6): Hedge Fund Meltdown
StreetInsider.com has put together its 'Top 15 For 2008' which chronicles our view of the most significant news on Wall Street during the tumultuous year.
Number 6: Hedge Fund Meltdown
'Hedge fund' has been the buzz-word in the investment community over the last decade. Everyone either wanted to be running one or invested in one. The billions being made by hedge fund managers made even some of the top-paid Wall Streeters envious. If you were lucky enough to be invested with one of the top managers you were considered 'golden'. In 2008, the shine of the hedge fund world ended - and when it ended it was UGLY!
On average, hedge funds lost 18.3% in 2008. This number was far better than the 37% loss for the S&P 500, but for a strategy that is supposed to do well in good and bad markets 2008 was a big blow for the industry. About 7% of the industry, or 700 hedge funds, closed in the first nine months of 2008.
Hedge funds faced a number of major issues in 2008, with the biggest being market declines, de-leveraging, redemptions and illiquid assets. All of these issues coinciding created a vicious downward spiral that had many titans in the industry reeling. In addition, as if 2008 wasn't already bad enough, in December money manager Bernard Madoff confessed to a $50 billion Ponzi scheme which sent shock-waves through the hedge fund world, especially the fund of fund business which invested heavily with Madoff.
The downward spiral in hedge funds looks something like this:
- Hedge Fund WXYZ Is Down 10% Because Illiquid Assets They Own Fall
- WXYZ Investor Wants Their Money Out
- WXYZ Needs To Sell Liquid Assets (Like Stocks) To Pay For Redemptions
- Assets WXYZ Is Selling Fall In Price
- Because The Assets WXYX Owns Was Leveraged, The Loss Is Magnified and More Collateral In Needed
- More Selling
- Hedge Fund WXYZ Is Now Down 20%
- More Clients Want Out
- More Selling
- More Collateral Required
- More Selling
etc, etc, etc.
Now take this scenario and multiply it by hundreds and you have a situation for a melt-down, which is exactly what happened. Many hedge funds halted redemptions in 2008, claiming that selling their illiquid assets would further lower values.
Some of the most widely followed hedge fund missteps in 2008:
- Jeffrey Gendell's Tontine Capital liquidated two hedge funds after heavy losses
- Ospraie, a large commodities hedge fund, closed its main fund
- Ken Griffin's Cidatel was down 53% In 2008
- Steven Cohen's SAC Capital moved half his money into cash as he felt the trading environment was too difficult.
- Och-Ziff Capital assets under management dropped to about $22.1 billion from more than $33 billion.
- Paul Tudor Jones suspended redemptions from his $10 billion flagship hedge fund.
- Philip Falcone's Harbinger Capital restricted redemptions.
- Morgan Creek Capital Management LLC fell over 50%.
- Arience Capital liquidated funds.
- Sunova Capital liquidated funds.
- Fairfield Greenwich's Fairfield Sentry Ltd was invested with Madoff.
- Tremont Capital was invested with Madoff.
John Paulson's Paulson & Co bucked the trend, managing a 37% gain in its Advantage Plus Fund despite the turmoil. James Simons' Renaissance Technologies, which uses computer-based models, also posted gains in several of its funds.
While 2008 was arguably the toughest year hedge funds have seen to date, 2009 could be even worse. Some think that half of all hedge funds could be shuttered in the next 12 months.
Stocks Mentioned
Related Entities
- Harbinger Capital
- SAC Capital
- Citadel
- Ken Griffin
- Renaissance Technologies
- James Simons
- Steven A. Cohen
- Paulson & Co. (PCI)
- Jeffrey Gendell
- Standard & Poor's
- Tontine Partners
- Tudor Investment Corporation
- Hedge Funds
- Bernard Madoff
- Top 15 For 2008
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