Several have written to frantic investors to reassure them that they're closely monitoring their investments, said Nadia Papagiannis, an analyst at Morningstar.įor many funds of funds, it's too late. Many funds of funds that were wiped out with Madoff have come under fire for not adequately vetting his trading strategy and for failing to diversify investors' assets. Among the largest victims were investors in "funds of funds" - capital pools that invested across a number of hedge funds, supposedly limiting risks. Hedge fund investors are also grappling with the still unknown toll of Madoff's alleged Ponzi scheme, which authorities say bilked investors of billions of dollars. He said he expects to lose about 20 percent of his capital from redemptions. "It's disappointing," said Robert Romero, manager at Palo Alto, Calif.-based Connective Capital, a $120 million hedge fund that delivered a 3.5 percent return in 2008. In recent weeks, dozens of hedge funds have imposed "gates" keeping investors from withdrawing their money, fearing a run on their assets that could drive them out of business.Īs troubled funds throw up the gates, investors have little choice but to pull money from healthier funds, which then are forced to sell assets to raise cash. Those who got their money out were the lucky ones. Investors yanked $40 billion out of hedge funds in October, according to Hedge Fund Research. Unnerved by losses, many hedge fund investors want their money back. "We could see the world coming to an end before our very eyes," Wang said. Wang, 36, said his fund "became ultra-bearish" once the scope of the credit crisis became clear. Using a strategy of "short-selling," or betting that stocks will fall, he managed a return of 80 percent.
Still, not every hedge fund lost money last year.Ĭhris Wang, founder and portfolio manager of New York-based SYW Capital Management, enjoyed a sizzling 2008 managing $52 million in assets. The steep declines mean that most portfolio managers will be taking much smaller paydays in 2009. Hedge funds' assets hit an all-time peak of $1.93 trillion in June but have since fallen to $1.56 billion, according to Hedge Fund Research. That fee structure has reaped eight- and even nine-figure paydays for the most successful portfolio managers.īut not now. Investors typically are charged a yearly fee equal to 2 percent of assets and 20 percent of profits. Many hedge funds use complex models to trade crude oil and soybean futures, derivatives and other exotic assets out of reach to ordinary investors.
Today, there are some 10,000 hedge funds, most of which cater to wealthy investors and promise big returns in virtually any economic climate. The loosely regulated pools of capital burst onto the investment scene in 1990 with $39 billion in assets and quickly ballooned in numbers. The Dow Jones industrial average lost 34 percent in 2008, while the Standard & Poor's 500 index fell 38 percent.īut hedge funds were never supposed to lose money. Still, compared with the wider market, hedge funds don't look so bad. But even then, funds only lost an average of 1.45 percent. The only other negative year on record was in 2002.
The average hedge fund lost 18 percent of its value in 2008, the industry's worst performance on record and down from an average gain of 9.96 percent in 2007, according to Hedge Fund Research. "All anyone really wanted was performance, and managing risk was a drag on performance," Fleckenstein said.
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