Alpha - September 2007 - (Page 33)

Cover Story Market Turmoil Summer The August market meltdown, which started with U.S. subprime mortgages and eventually engulfed credit products and equities around the globe, left many managers with sizable losses — and their investors wondering whether hedge funds are worth all the work. By Loch Adamson Cruel,Cruel S omeone, somewhere, has lost a lot of money. As the subprime mortgage crisis in the U.S. spread through the credit and equity markets last month, hedge fund managers watched price movements with a concern bordering on obsession. Volatility skyrocketed as investors realized that a whole slew of collateralized debt obligations, or CDOs, issued by major investment banks were largely worthless, their ratings rendered null and void by the rapidly growing number of subprime mortgage defaults. The challenge of marking those assets to market will make valuations a nightmare for banks and hedge funds alike. In August, Federal Reserve Board chairman Ben Bernanke warned that the losses may run as high as $100 billion. But the announced losses are nowhere near that, leading to speculation that somewhere in the world a bank or a hedge fund is silently hemorrhaging red ink. Several of the most illustrious names in the hedge fund business have already been infected by the subprime con- tagion, including AQR Capital Management, Caxton Associates, Goldman Sachs Asset Management, Moore Capital Management, Renaissance Technologies and Tudor Investment Corp. Most of the ﬁrms have recovered somewhat from their midsummer losses, but others, like Sowood Capital Management, were forced to liquidate. For August, Chicago-based Hedge Fund Research’s HFRI fund-weighted composite index was down 1.31 percent, and investors were left shaking their heads. “Our expectation is that continued volatility and stress in the credit markets — and eventually the possibility of protracted stress in the equity markets — could cause a lot more disappointing returns in the hedge fund industry going forward,” says Michael Ross, chief investment officer of Makena Capital Management, a Menlo Park, California, ﬁrm that manages $10 billion in a multiassetclass pooled fund for university endowments and other large institutional clients, including about $2 billion invested in hedge funds. “Ironically, this is exactly the kind SEPTEMBER 2007 • INSTITUTIONAL INVESTOR’S ALPHA • 33

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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