Dear investor: We have no clue

Date: Friday, April 4, 2008
Author: International Herald Tribune

Hedge fund managers generally see themselves as smarter than the average investor. After all, their business is finding profits that others miss and earning above-average returns. How else can they justify their legendary fees, unless they are bringing extra insight to the table?

Lately, though, even these high-finance wizards seem lost. In their letters to investors, many hedge fund managers have conceded that they have little to no idea what is in store for the markets, which have been swerving in directions that fancy computer models could never predict.

''We are in the process of trying to figure out if the world is coming to an end (which we still doubt) or if the global sell-off was more a function of $75 billion in futures being liquidated over a U.S. holiday,'' Daniel Morehead, chief investment officer of Pantera Capital Management, wrote this year in a letter to investors after a bruising January.

On the question of where the markets are going, Cerberus Capital Management all but threw up its arms. ''We do not know what will happen with the economy or the markets,'' Stephen Feinberg, managing member, and William Richter, senior managing director, wrote in January to investors of Cerberus, which runs hedge funds and private equity funds and has a controlling stake in Chrysler. ''We are not macroeconomists, and even the best of those do not have the answers.''

Scott Booth, founder of Eastern Advisors, whose hedge funds focus on Asian markets, made no effort in an investors' letter to hide his uncertainty.

But in a Zenlike twist, he suggested the admission was actually a strength: ''There is no shame or lack of erudition in admitting we simply don't know,'' he wrote in the letter in February. ''If anything, it is one of the most underappreciated traits of good decision-making.''

Some hedge funds are still prognosticating. Byron Wien, a 40-year veteran of the stock market who is now the chief investment strategist for Pequot Capital, predicted in his March commentary that ''the present problems will persist and it will be later this year or sometime in 2009 when we will see demonstrable improvement in the economy.''