Suddenly there is a raft of articles about failing hedge funds... Since normal folks like myself were generally excluded from hedge fund riches, Im not too put out by the news.
The real story for me is who is actually losing money here. The media focuses on the big money winners in the stock market but there are a lot of big money losers out there. Where are these losses going to show up? In the dot-com crash, it was a lot of pension and retirement money that got lost. Not so here.
Despite Blue-Chip Gains, Hedge Funds Increasingly Are Faltering and Closing
October 4, 2006
As the Dow Jones Industrial Average climbs to record heights, many hedge funds are stumbling and more than ever are closing shop.
The latest to falter: Vega Asset Management. One of the world's largest hedge funds a few years ago, Vega has suffered losses from a bad bet against U.S. bonds, and is now down roughly 75% from its peak two years ago to about $3 billion in assets. The firm says it has no plans to cease operations.
New figures show that more than 1,000 hedge funds have shut in the past two years, as competition has squeezed profits. Even some veteran managers, in a bid to boost returns, have made concentrated bets that have backfired. All this has set up the $1.23 trillion industry for its first meaningful consolidation, Wall Street executives say.
In just the past few weeks, Amaranth Advisors LLC announced plans sell to its investments after losing $6 billion, mostly in the energy markets, heightening the prospects it will close its doors. Narragansett Management LP in New York recently said it will return $800 million to investors. And two European-based hedge funds recently have told investors they are shutting down one or all of their funds.
Vega, which has offices in Spain, London and New York, managed about $12 billion a couple of years back and about $6 billion as recently as January. It once was seen as a winner in the growing popularity of hedge funds among large institutions.
Vega's misstep comes as a number of hedge funds -- investment pools catering to wealthy individuals and institutions -- have closed their doors for business. The shutdowns are noteworthy because they include a couple of funds run by managers with sterling pedigrees. Among them: two funds set up by Hans van Hoof, the former Europe chief of Soros Fund Management and another fund run by Thierry Serero, a former manager at Fidelity Investments' Fidelity Europe mutual fund.
Since January 2005, a total of 2,622 new hedge funds have been launched, according to Chicago-based Hedge Fund Research Inc., which compiles data on the industry. But 1,071 funds closed during that time. In 2005 alone, 848 funds closed, representing 11.4% of the funds in operation at the start of that year. This is more than double the closure rate of 2004, when 296 funds shut, or 4.7% of the funds in business at the start of that year.
A bit about why Amaranth didnt sink the economy like LTCM did a few years back.
How the Wreck From Amaranth Was Contained
J.P. Morgan and Citadel Swooped In, Assumed Risk, Proving Markets' Resilience
October 5, 2006
As Amaranth Advisors scrambled to unload its sinking energy investments last month, here is what potential bidders saw:
There were thousands of complicated contracts at the Connecticut hedge fund to buy and sell natural gas, power generation and oil in increasingly jittery markets across the globe. Though some were regulated by futures exchanges, others were one-on-one deals with two dozen or so banks and other investors. Some were in markets with relatively few buyers and sellers, making them vulnerable to big price moves.
In other words, this multibillion-dollar transaction looked like it wouldn't be easy to accomplish quickly without causing broader market turmoil. Yet J.P. Morgan Chase & Co. and hedge fund Citadel Investment Group LLC managed to smoothly assume Amaranth's energy portfolio in under 48 hours.
How they did it illustrates the global markets' resilience to massive blowups at a time when some other hedge funds are struggling.
The transaction was a two-step process, people familiar with it said. J.P. Morgan's bankers and Citadel's portfolio managers first raced to estimate the value of Amaranth's investments -- a difficult task, given the illiquidity of some of the markets the hedge fund focused on. Derivative trades -- contracts whose value rises and falls based on an underlying asset's price -- aren't like stocks and bonds. How much is an asset worth if there is a paucity of investors regularly trading it?
Then they spent a furious day persuading those two dozen or so counterparties to rip up their derivative-trade contracts with the struggling hedge fund and sign agreements with the new owners, and then transfer the portfolio to them. Along the way, J.P. Morgan and Citadel hashed out their own agreement to share the deal's risk and potential upside.
