When a Publicly Traded Hedge Fund Blows Up

For the overwhelming majority of investors in hedge funds -- and fund-of-funds managers, and hedge-fund consultants, for that matter -- it's really hard to get a solid grasp of any given fund's risk management procedures. All funds will tell you that risk management is their first priority, but as a result of that such protestations are not very useful.

One consequence of this is that the hedge-fund universe is increasingly dominated by large professional managers: their relatively long histories of managing money and a large number of employees mean that their protestations about risk management start to ring true. Some of those managers, such as Fortress (FIG) and Man Group ((LON: EMG)), have taken the extra step of going public, which opens them up to more scrutiny and reassures current and future investors even more. Not only do such investors know that there are a lot of eyes on these managers, but they also know that the managers have every internal incentive to avoid blow-ups, since one big failure at one of these groups will adversely effect all of the other funds in the group as well. After all, if there was clearly insufficient oversight when it came to the managers of Fund A, there's not much reason to trust in the managers of Fund B, and so the failure of Fund A is likely to have nasty effects on all the other funds in the group.

Which is why Friday's news comes as something of a surprise.

Simon Treacher, a fund manager at publicly-listed BlueBay Asset Management, has been fired from his job for "breaching internal valuation policy", and his fund, the BlueBay Emerging Market Total Return Fund, is being closed down after losing 53% year-to-date.

Treacher was in many ways the face of BlueBay, an emerging-markets veteran who was at BlueBay from its inception and who was previously a key executive at the enormous and widely-feared Moore Capital; before that, he had run the largest emerging-markets fund in Europe, at Deutsche Asset Management. He's no rogue trader, and neither is he a fresh-faced kid who's only known up markets and who had no idea that EM investments can ever go down.

Paul Murphy thinks that Treacher's being thrown under the bus in a desperate attempt to save the company, and notes that the FSA is investigating what's going on. But all the same, Treacher was running a long-short fund: there's really no excuse for its losing more than half its value this year -- and probably much more than that, by the time it's unwound.

Clearly there are problems at BlueBay which are bigger than Treacher -- especially since BlueBay admits that Treacher's mismarks "were too modest to make any difference to the overall net asset value figure" and didn't cause him any personal gain.

BlueBay's woes could infect publicly-listed hedge-fund managers more broadly. If it can happen to BlueBay, it can happen to any of them. And if even the big publicly-listed managers aren't immune from weak risk controls and blow-ups, then there's really no such thing as a safe hedge-fund investment.

Obviously this one piece of news doesn't mean the end of hedge funds as an asset class. But it certainly won't do anything to reassure hedge-fund investors that it's possible for them to have any real reassurance that their money is safe.

Comments

[mavericks:]

What we are seeing is possibly the largest re-distribution of wealth back to where it is needed. Forced liquidations at hedge funds and other institutions is essentially the rich and over-leveraged selling at the bottom to get their money back. On the other side of the trade, we have the US Govt. willing to take the world's debt off of Joe Atlas' shoulders and put it squarely on their own. Let's hope the Fed is buying low, since the leverage THEY are willing to take on is unparalleled and the opportunity to make a fortune is huge...as is the potential for Uncle Sam to fall flat on his face if it fails.

2008 Nov 30 11:20 AM

[notsosmart:]

all hedge funds should blow up.the wealthy chasing more wealth.who needs them.what would happen if they all collapsed? dont need WSJ either.just another rag with an agenda.

2008 Nov 30 12:41 PM

[swaps:]

Right.
After stealing so much wealth through bonuses and stock options - distributing excessive wealth to themselves - they then turned it over to hedge funds to make them richer. The hedge funds then borrowed out of thin air fiat money from the banks and proceeded to bid up the prices of everything from houses to oil to public stocks.

They pushed prices to high the sheeple upon whom this whole charade rests was unable to keep up because the banks would not leverage their own modest bank resserves by 10 or 20 to one.

Collapse.

The destruction is being felt by all but the greedy graspers at the top of the pyramid have no tolerance for economic pain - and screamed for the bailouts to restore their illbegotten fiat money.

Conde Nast Portfolio predicts thousands of hedge funds will go out of business. Good riddance. But that likely means the wreckage they have left in their wake - still held by us unleveraged sheeple - will grow back to the sky much more slowly.

It will be sustainable, hopefully.

As for the hedge fund managers - why shouldn't they be out of a job? They were too stupid to actually hedge.

And when they reincarnate into their new lives on Wall Street, they will still be stupid - but less stupid than the next wave of people who throw their left over money at them.

2008 Nov 30 04:04 PM