Where Are the Big Hedge Fund Failures?

There is an article in the Times Online asking the question of why we are not hearing about more hedge fund failures as the current credit crisis has intensified over the last few weeks.

The author believes the reason is that the current problems are due less to a credit crisis problem and more to an ownership problem -- the real problem is the divergence between listed companies and their dispersed shareholders. While hedge funds have done poorly, and some will no doubt fail as a result of the current market issues, the numbers to date are not much different than normal attrition in the industry. Since hedge funds are private partnerships, it is believed that they will therefore continue to not have the same ownership problems that are plaguing the market.

Of course, besides ownership differences, hedge funds also have some other unique attributes. For one, hedge funds can keep their investors from withdrawing money, unlike listed companies. A run on the fund is less likely, at least right after a major event, unlike shareholders of listed companies who can sell their shares en masse right now.

Also, hedge funds do not have to publicly mark-to-market all their assets and disclose all their underwater positions, allowing them to hold positions that may currently have irrational prices. Many [not all] also seem to take hedging and risk management into consideration, or at least are able to use their flexibility to respond to the market a little more quickly.

Some hedge funds will no doubt fail as a result of the current issues in the market, but I suspect that poor risk management, poor decisions, over-leverage, greed, stupidity from numerous stakeholders, and the inability to ride out the storm (due to mark-to-market or other liquidity issues) have more to do with recent failures than ownership issues.

Disclosure: None

Comments

[Stephen Fra...:]

...maybe because hedge funds were shorting on the way down?

Up for sale on ebay:
RIPLehman.com
RIPAIG.com

2008 Sep 19 02:36 AM

[notsosmart:]

does it really matter as hedge fund investors are wealthy.they can lose without hurt as they seek even more wealth.the owner/managers make out like bandits win or lose.

2008 Sep 19 10:28 AM

[KVSSNrao:]

If investment banks have failed because they had ownership position in some securities, even hedge funds that have ownership in similar securities will fail. Is the rule of marking to market responsible for failure of investment banks?

I think the name of investment bank needs to changed to securities bank and any one who wants to be a securities bank has to be regulated more. Hedge funds also are to be renamed as risk or trading funds and while they may be regulated for their transactions with subscribes, their market transactions can be totally free. Some hedge/trading funds may fail because of high risks that they have taken, but it is well known to every body that there is a likelihood of total failure. Mutual funds should not be allowed to become trading funds. Mutual funds should not be allowed to increases their leverage. Trading funds are employing the leverage.

2008 Sep 28 02:14 AM