Institutional Investor's Alpha Magazine - October 2008 - (Page 41)

The New Hedge Fund Economics WITH MOST FUNDS LIKELY TO FINISH 2008 WELL IN THE RED, MANAGERS WILL NEED TO LEARN HOW TO MAKE ENDS MEET FOR AT LEAST THE NEXT YEAR IN A WORLD WITHOUT PERFORMANCE FEES. BY STEPHEN TAUB ike scores of hedge fund managers this year, Richard Brennan has fallen victim to the global credit crisis and market meltdown. Brennan is the founder of Camulos Capital, a $2.5 billion Stamford, Connecticut–based ﬁrm that specializes in credit strategies. By early September his long-biased Camulos Master Fund had plunged 20 percent, to $1.8 billion, and Brennan, anticipating a wave of redemption requests before the September 30 deadline, swung into action. Instead of erecting a gate — which would have prevented investors from bailing out by limiting withdrawals but could have been seen as a death knell — he offered a different solution: Agree to stick around for at least one more year, and Camulos would cut its fees. The initial reaction was cool. But as Camulos investors saw the U.S. government step in to bail out Fannie Mae, Freddie Mac and other large financial institutions, they warmed to the proposal to reduce the fund’s management fee from 2 percent to 1.25 percent and its incentive fee from 20 percent to 10 percent in exchange for locking up their money until September 30, 2009. Eventually, more than 85 percent of the fund’s investors agreed to the proposal. Camulos is hardly alone. Through the ﬁrst nine months of this year, roughly 90 percent of hedge funds were underwater and hundreds were down well into the double digits, including funds run by some of the industry’s best-known managers: Lee Ainslie of Maverick Capital, Timothy Barakett of Atticus Capital, Noam Gottesman of GLG Partners, Kenneth Grifﬁn of Citadel Investment Group, Christopher Hohn of the Children’s Investment Fund Management (UK) and Stephen Mandel of Lone Pine Capital. Barring a miraculous reversal in the global markets, 2008 is shaping up to be the worst year for hedge funds since Chicago-based Hedge Fund Research began tracking their performance in 1990. In September, as Congress was arguing over the Treasury Department’s $700 billion bailout of the troubled financial services industry, the HFRI composite index plunged 5.42 percent, its worst month in more than a decade. For the ﬁrst nine months of the year, it was down 10.11 percent. The hedge fund industry is operating on very shaky ground. The rush of institutional money into hedge funds for the better part of this decade is a distant memory. Spooked by the growing global crisis, investors are looking to raise cash wherever they can, and hedge funds — which for the most part have held up better than long-only investments — are one of the most liquid alternatives. A wave of 90-day redemption notices began to ﬂood ﬁrms in late September. By some estimates as much as $500 billion could ﬂee the $1.9 trillion industry by early 2009. For some the losses and redemptions are simply too great to overcome. In early September, New York–based Ospraie Management began liquidating its ﬂagship Ospraie Fund, which had lost nearly 40 percent this year because of bad bets on commodity stocks, according to a letter sent to investors by founder Dwight Anderson. Ospraie planned to distribute 40 percent of the fund’s assets by September 30, an additional 40 percent by year-end and the balance — which ﬁgures to consist mostly of illiquid investments — over the next three years. OCTOBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 41

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2008

Institutional Investor's Alpha Magazine - October 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Process of Evolution The Good Guys: Israel's Champion Interview: Fast Lessons for Hard Times Cover Story: Industry Under Siege The New Hedge Fund Economics Good-Bye, Easy Money Caging the Shorts Strategies: Bottom Fishing Profile: Cult of Personalities Research Center: Alpha Awards: Eye of the Storm Alpha Bytes: Funneling the Chatter Unhedged: Commentary: Attention, Hedge Fund Shoppers

Institutional Investor's Alpha Magazine - October 2008

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