Hedge fund cowboys damaging industry: Veritas

Date: Friday, December 5, 2008
Author: Laurence Fletcher, Reuters.com

Hedge funds are suffering "tremendous" reputational damage because promises to make money whichever way markets move have not been fulfilled, although in the long run the industry will benefit from the shake-out, Veritas Asset Management manager Ezra Sun said.

Hedge fund "cowboys" boosting returns with lots of borrowing rather than smart strategies were the main culprits for the reputational damage, with investors blaming them for charging high fees and blocking them from withdrawing their money, he said.

"The market in the past few years has been rewarding people who've been running basically leveraged long-only funds," Sun told Reuters in an interview.

"They are now being shown to be basically cowboys, and a lot of them fell off their horses," he said.

Many hedge funds were charging high fees but not hedging out risk said Sun, who runs the $132 million Real Return Asian hedge fund and the $543 million Veritas Asian long-only fund and who was previously at Newton Investment Management.

The $1.7 trillion hedge fund industry's biggest ever crisis has seen funds lose 15.54 percent in the first ten months of the year, with long/short equity funds down 19.46 percent.

"In my view they didn't do what they set out to do ... which was to hedge. I saw a few hedge funds that did much worse than my long-only fund, which is rather ironic," he said.

The losses have disappointed many investors who had expected positive returns in all market conditions, and hefty withdrawals of somewhere between a fifth and a third of the industry are widely expected at the end of the year. There was the risk people could perceive hedge funds as a "rip-off" because they had been charging high rates on the implicit promise they could deliver absolute returns, but did not deliver when global markets collapsed.

And the industry's reputation was also being hurt as some firms bar investors from withdrawing their cash, Sun added.

But the damage done was unlikely to be permanent and the current shakeout should leave the industry on a better footing.

"To some extent we welcome the cleansing that is taking place -- the charlatans and the people masquerading as hedge fund managers are being found out."

Meanwhile Sun said he was currently trading more than normal because extremely high levels of market volatility meant a 'buy and hold' strategy no longer worked.

"You need to keep your head low in this market ... It's basically guerrilla warfare .. you see an opportunity, you take it, you get out. Doing a major second world war campaign, you die," he said.

(Editing by Douwe Miedema and Greg Mahlich)