Volatility Is Back, So Why Aren’t Hedge Funds Happy?

Date: Friday, August 3, 2007
Author: Hedge Fund Daily

Volatility is back with a capital V, so why doesn’t that stand for victory in the hedge fund universe? When the market barely moved, they longed for the return of volatility, but only a few, such as Paulson & Co. – up 22.6% in July on its subprime bets -- has reaped the rewards that come with capitalizing on wild market swings. One of the reasons for the dismay in hedgeland, reports The New York Times, is that while HFs have a lot of money, the cheap debt market has basically shut down, making it difficult for hedge funds to borrow money for big deals. With a bad July behind them, and maybe worse days ahead, hedge funds will have to deal with nervous investors who want to pull their money, and if too many of them demand it, that would force HFs to sell off assets in bad market leaving them with less to shop with in a volatile market. The situation, says the Times, is tough on hedge funds, which have to mark positions, as opposed to public equity firms, which don’t, and especially rough on those HFs that went public and have to produce monthly figures and face angry investors. The Times calls the trend for hedge funds to go public “the ultimate paradox,” namely the “very bizarre logic” of trading in the relative tranquility that comes with not having to answer to anyone as a private entity, with no month-end reports to produce, to an existence that calls for an “every-month mentality” and “short-termism.” It is no wonder, then, that The Blackstone Group and Kohlberg Kravis Roberts constructed their initial public offerings in such a way that its new cadre of investors have little power to run their businesses.