HEDGES CLIPPED-Race to find the near-death hedge fund
NY Post article By RODDY BOYD- 18 May 2005
Hedge funds choking on ill-fated bond bets are dragging to an end the golden days of the money managers catering to the world's super-rich. The slump of April and May wraps up a three- and four-year run of superior returns, fund managers and investors said.
No funds in the $1 trillion hedge fund universe have collapsed according to traders, but several are shaping up as the poster children for leveraging their cash into stock and bond positions that turned out to be riskier than anticipated, according to hedge fund brokerage executives at banks and dealers.
Another issue contributing to fund losses is the forced selling of bonds to raise money to meet investor redemption requirements. One big investor, Bank of America — according to three separate funds — has pulled $1.8 billion in capital from 15 separate hedge funds. The bank had made the investments over the past 18 months, said one manager.
A Bank of America spokesman declined to comment on its investment activity.
Also, spurring chatter was the confession by Bailey Coates, a London-based fund, that it recently closed its New York office recently to focus on its European investments. The fund is down 15 percent this year, and its assets under management have dropped to about $500 million from almost $1.3 billion a year ago. The fund's founder, Jonathan Bailey, said the firm bet wrong on stocks and had no bond or derivative positions.
The race to find the near-death hedge fund was sparked last week when two popular trades became sudden — and substantial —money losers. Standard & Poor's cut General Motors $300 billion in debt to so-called junk status, and while the move was expected, many managers thought it would come over the summer, sending the prices of GM bonds plunging.
As the bond dropped in price, the stock sold short in order to hedge the bond position, which shot up in price when billionaire investor Kirk Kerkorian announced his intention to buy 5 percent of GM, leaving both sides of the trade underwater. Short sellers bet that shares will fall.
Robert Watson, a partner at hedge fund investor Lyster Watson said the industry is experiencing a necessary correction. "Things had gotten too expensive in almost any strategy you looked at," he said. He said fund managers consistently made bundles of money in corporate bond trading for more than three years. Watson added that the declines in the convertible and corporate bond markets would eventually pose "a great buying opportunity" for those managers who have conserved cash.
Convertible bond hedge funds are down 6.29 percent this year, according to hedge fund researcher, the Hennessee Group.
Although bond, or credit, trading funds encompass dozens of different styles, the ones that have heavy GM exposure are probably down 3 percent to 4 percent so far, said a manager of a $2.5 billion fund in Midtown.
Although hedge fund performance results for May won't be available until mid-June, Watson, whose firm has a little over $2 billion invested with dozens of different hedge fund managers, said indications based on conversations he is having are "there won't be any horror stories. There's no disaster scenario out there."
