Hedge Fund Fiasco Growing In Breadth, Depth

Date: Friday, August 10, 2007
Author: FINalternatives.com

It’s not 1929, exactly, but hedge fund managers might be forgiven for the hyperbole.

The carnage and catastrophe wrought by the collapse of the sub-prime market continue to hit hedge funds particularly hard. And hedge fund misery is now spreading to previously immune sectors of the market.

Quantitative funds, in particular, are having a rough go of it. Previously untouchable names, including Goldman Sachs’ Global Alpha and Renaissance Technologies are taking big hits, with the former down about 16% this year, and the latter dropping 7% in just the first few days of August. Highbridge Capital Management’s $15 billion multistrategy fund is down 4% this month already, and some of Tykhe Capital’s share classes are down between 17% and 31% through Aug. 9.

Goldman’s troubles, however, are no longer limited to the erstwhile Cadillac of Hedge Funds. Its North American Opportunities Fund, an equity market-neutral vehicle, was down 15% through July 27, before the market bloodbath of the last several days. The once $767 million was down 11% in July. And the troubles in its hedge funds are no longer Goldman’s alone.

Both North American Opportunities and Global Alpha have been selling positions, contributing to the downward spiral in equities markets. Sources told Financial News that Goldman, hit with a massive redemption request—unloaded some $9 billion in positions. Its moves, along with those of other troubled hedge funds, sent large-cap names into a tailspin yesterday.

“Part of the reason you saw the [General Electrics] and [Proctor & Gambles] and stocks like that getting crushed today is that those were relatively liquid stocks,” buyout king Wilbur Ross said on CNBC yesterday. “Those were things that hedgies could sell because a lot of them know they need to build up cash reserves to deal with what probably will be some big redemptions.”

At the same time, an economist with the New York Federal Reserve Bank told securities analysts that hedge fund losses could be a predictor of trouble for investment banks.

“There is indeed such a predictive relationship,” Tobias Adrian said, though he warned that it was difficult to tell whether hedge funds increased or decreased the chances for a Wall Street disaster.

Meanwhile, in the face of the Dow Jones Industrial Average’s almost 400-point drop yesterday, Adrian’s bosses at the Federal Reserve said today the central bank would pour enough money into credit markets to keep them afloat. In a statement, the Fed said it is “providing liquidity to facilitate the orderly functioning of financial markets.”

The Fed was simply following the lead of the European Central Bank, which both yesterday and today moved to prop up the faltering credit markets, injecting tens of billions of euros. The ECB move came as the U.S. sub-prime disaster, already wreaking havoc in its own country as well as in Australia, reached the Old World. BNP Paribas, one of France’s largest banks, froze redemptions in three funds holding some €1.6 billion (US$2.2 billion).

“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating,” the bank said in a statement. “BNP Paribas Investment Partners has decided to temporarily suspend the calculation of the net asset value as well as subscriptions/redemptions, in strict compliance with regulations, for these funds.”

BNP said the trio of funds—Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia—had seen their asset level fall by almost a quarter over the past several weeks, primarily due to redemptions.

Meanwhile, on the other side of the pond, London-based Man Group, the world’s largest publicly-traded hedge fund manager, shelved plans for the first listed hedge fund in the U.S. for the time being.

Man had planned to list its Man Dual Absolute Return Fund on the New York Stock Exchange in September, but has postponed the listing indefinitely, spooked by the sub-prime disaster, tumbling stock markets and the poor performance of Fortress Investment Group and Blackstone Group shares since their initial public offerings earlier this year.

Man may also have been concerned about the performance of the two funds in which it planned to invest the proceeds: Its own AHL Core strategy, which has suffered losses this year, and the aforementioned and unfortunate Tykhe Capital.

But don’t think that the widening disaster hasn’t forgotten its first high-profile victim: Bear Stearns was hit with the first bona fide client lawsuit this week, as one of its limited partners decried the “meager steps” Bear took to prevent the collapse of two of its hedge funds with big sub-prime exposure.

New York-based Navigator Partners had more than $700,000 invested in the Bear Stearns High-Grade Structured Credit Strategies Fund—the less leveraged, and thus less catastrophic, of the collapsed pair. The lawsuit, filed in state court in Manhattan, said Bear “failed to disclose to investors the significant challenges facing the partnership, and the meager steps they were taking to face those challenges, while at the same time reaping substantial fees.”

Bear pooh-poohed the complaint, saying in a statement, “The plaintiff is an experienced investment firm and, as described in the fund’s materials, this was a high-risk, speculative investment vehicle.”