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Bad Bets and Accounting Flaws Bring Staggering Losses

Date: Tuesday, February 12, 2008
Author: Jenny Anderson, The New York Times

Mark S. Fishman was a modern prince of the markets — a pedigreed money manager who raised billions of dollars at the height of the hedge fund boom.

But last week his dream collapsed. Hobbled by bad trades in the credit markets, Mr. Fishman began to shut the fund he helped found, Sailfish Capital Partners, which oversaw $2 billion just six months ago, investors said.

On Monday Mr. Fishman, 47, sat in the paneled Princeton Club of New York, explaining what it was like to battle the markets — and lose.

“It feels like someone has died,” Mr. Fishman said, his eyes welling up. “We’ve disappointed people, and there is no one more disappointed than me.”

Mr. Fishman is not the first hedge fund manager to run into trouble — and he certainly will not be the last. After years of explosive growth, this secretive, sometimes volatile corner of the financial world is entering a dangerous new era. The running turmoil in the markets is stirring fears that more of these funds will fail, some, perhaps, spectacularly.

“This will be the year with the highest number of hedge fund failures given the huge number of new and untested hedge funds,” said Bradley H. Alford, founder of the Atlanta-based Alpha Capital Management, an investment advisory business.

“Last year there were some easy trades: short financials, short subprime, long non-U.S and emerging markets. This year there’s no clear trend and no safe place to hide.” So far few funds have suffered the same fate as Sailfish Capital. But the signs are troubling. The average stock-picking hedge fund sank 4.1 percent in January. While that tumble was not as steep as the one taken by the broad stock market — the Standard & Poor’s 500-stock index was down 6 percent — it nonetheless represented the hedge fund industry’s worst showing since November 2000. Few of the investment strategies employed by these funds made money.

Big-name funds are suffering. David Slager and Timothy R. Barakett, who run the Atticus European Fund, lost more than 13 percent, and Lee Ainslie, who heads Maverick Capital, lost 9 percent through Jan. 25, according to SYZ & Company, which tallies hedge fund returns. (Compare that with 2007 performance when the funds returned 27.7 percent and 26.9 percent, respectively.)

Even Goldman Sachs, which turned out record profit last year while many other Wall Street banks stumbled, is struggling to make money for its hedge fund investors. Its $7 billion Goldman Sachs Investment Partners fund, started on Jan. 1, fell 6 percent last month.

Press officers for Atticus and Goldman declined to comment. A spokesman for Maverick could not be reached.

“People who have been in business for 20 years are saying January was one of the most difficult and challenging times they have ever seen,” said a manager who oversees a fund of hedge funds, who asked not to be identified because he does business with many managers.

It is a remarkable turnabout for an industry that upended the old order on Wall Street and, in the process, redefined Americans’ notions of wealth. In recent years hedge fund money has driven up prices of everything from New York apartments to Andy Warhol paintings and reshaped the worlds of philanthropy and politics.

Managing a hedge fund has become the running dream on Wall Street. Since 2000, the number of funds has more than doubled, to 10,000. These private pools of capital now sit atop almost $1.9 trillion in assets.

Until recently, times in the industry were good, very good. On average, so-called long/short hedge funds — those that bet on some stocks and against others — returned 10.51 percent in 2007, according to Hedge Fund Research. The Standard & Poor’s 500, by contrast, returned a mere 5.49 percent, including dividends.

But making money is getting tougher. Many hedge funds are products of a bull market. Many profited by making leveraged bets on what were, until recently, steadily rising markets. Some plowed into emerging markets while others dove into the loan market. But now, as the credit squeeze tightens and talk of recession grows louder, those same markets have collapsed.

Sol Waksman, president of Barclay Group, an alternative investment database, said that three-quarters of the 1,241 hedge funds that have reported returns for January lost money.

“That’s a scary number,” Mr. Waksman said.

Many managers fear things will only get worse. The mood was bleak at a hedge fund conference given by Morgan Stanley recently at the Breakers resort in Palm Beach, Fla., according to people at the gathering.

Larry Robbins, the founder of Glenview Capital, a $9 billion hedge fund, captured the atmosphere of the conference, entitled, “2008 and Beyond,” with a bit of black humor. Asked what his strategy was for 2008, Mr. Robbins joked, “To get to, ‘and beyond,’ ” according to a person at the meeting. Mr. Robbins declined to comment.

Sailfish seemed like a hedge fund that might weather the storm. Before founding the fund, Mr. Fishman spent seven years working for Steven A. Cohen, the founder of SAC Capital Advisors, another hedge fund based in Stamford, Conn. Mr. Fishman called Mr. Cohen the “Michael Jordan” of the trading world.

Mr. Fishman and Sal Naro, a friend who worked at UBS, formed Sailfish in 2005, aiming to “build a better mousetrap,” Mr. Fishman said. The firm’s name is a play on their names.

The pair, both fixed-income specialists, quickly raised $1 billion for their flagship multi-strategy fixed-income fund, according to investor documents. Assets grew steadily, reaching $1.2 billion by the end of 2005 and $1.5 billion by the end of 2006, when the fund returned more than 12 percent. In July, the fund sat atop almost $2 billion, and exhibited relatively low volatility — a key factor for institutional investors.

But July proved treacherous. As the credit markets seized up, Sailfish owned seemingly safe top-rated investments, including mortgage investments, that suddenly plummeted in value.

“We are working exceedingly hard in an illiquid market to position the portfolio in a way that can withstand these conditions and enable us to participate aggressively as the market stabilizes,” Sailfish wrote to investors in August. The fund lost 12.5 percent that month.

“Wall Street was not willing to make orderly markets for high- quality short-dated paper,” Mr. Fishman recalled on Monday. “They didn’t know their own balance sheets.” (Banks have taken more than $200 billion in hits since August.)

Sailfish bounced back in September and October, but investors, alarmed by the deteriorating markets, began to take their money out of the fund. By the end of the year, Sailfish was down more than 15 percent. In January, it fell an additional 7 percent.

Last Thursday, Sailfish started to alert investors that the fund was likely to shut down, two investors said. Mr. Fishman visited investors in Chicago and California, these investors said, while Mr. Naro met with investors in New York. The fund met all its margin calls and has ample cash, said one investor who spoke with one of the principals. Neither of the fund managers would confirm that the fund was closing.

But Mr. Fishman will say what it is like to lose money for investors —including himself.

“It’s that sad dawning when you realize the market is so much bigger than you are,” he said.