Poor Old Hedgies Face More Rough Sailing « naked capitalism

Monday, January 5, 2009

Poor Old Hedgies Face More Rough Sailing

It is hard to work up much sympathy for newly-less-well-off hedge fund managers, given how rich the good times were. Nevertheless, they face continued pressure from redemptions, and (for most) high water mark provisions mean that they will probably get no or little in the way of upside fees (the 20 of the “2 and 20″ formula) this year.

In the past, when that happened to hedge funds, they often imploded, as did Julian Robertson’s Tiger Funds, because the staff decamps to funds where the funds aren’t in a performance/fee hole and they stand to share in fat performance fees. But with the whole industry contracting, and many funds suffering fee pressure, mobility is not likely to be great.

From the Financial Times:

Hedge funds are suffering a New Year hangover of record proportions after an end-of-year rush to suspend or restrict withdrawals of money and the first of what is expected to be a wave of closures.

Hedge funds are facing a meagre year after their worst 12 months on record left most needing to make back hefty losses before they begin earning performance fees. More than 150 – including funds from some of the biggest names in the industry, such as Tudor Investment Corp, Citadel, Cerberus Capital and Highbridge Capital – have limited redemptions.

Prime brokers, which provide services to hedge funds, and managers predict continued selling pressure into the markets from suspended funds for months to come as they try to cash in hard-to-sell assets. Withdrawals are widely expected to continue to the end of the first quarter.

More on this topic (What's this?)

Hedge Fund News: Soros, Citadel, Atticus, Caxton & More (market folly, 10/30/09)

Davidow Joins IndexIQ (Index Universe, 11/14/08)

Read more on Hedge Funds at Wikinvest

42 Comments:

Anonymous says:

January 5, 2009 at 11:42 pm

Wait until Mutual Funds and others join the rush to cash.

D

Anonymous says:

January 6, 2009 at 12:03 am

I really enjoy this blog.

But…

I’m wondering why Ms. Smith, and many other bloggers only analyze the ouput from mainstream media.

Why haven’t we seen any creative articles from Ms. Smith? Why not a daily article, in addition to the keen analysis of other’s efforts?

Is this a question of limitations, or only a tepid interest in blogging.

My guess, is that she probably makes at least 30,000/year from her google ads.

-perplexed in Joysee

Anonymous says:

January 6, 2009 at 12:19 am

Up yours Anon at 2.03.

What business of yours is it what she earns, it costs you zip to read, (?)learn or to comment?

Start your own blog where you can read the ungracious comments of others.

g

Yves Smith says:

January 6, 2009 at 12:19 am

1. I do not make anywhere close to the level you suggest from Google ads, despite having a large number of page views. You are hugely off in your estimate

2. Even if I did make that much, it would not even pay for rent in Manhattan BEFORE TAXES

3. Since this is a hobby that takes a huge amount of time, for which I over time have made less than minimum wage, I politely suggest you not complain. It takes a lot of time “merely” to troll the MSM and blogs, then figure out what to say.

4. There is value in pointing out stories/angle that are not getting the attention they deserve, and perhaps more important, dubious ideas that are treated as gospel truth.

5. Have you ever written an original article for publication? I have written for publication for over 15 years and know what it takes. It is a ton of work. Most of the bloggers that do have day jobs that allow that sort of thing to be a by product of their work (Brad Setser falls in that category, his blog is part of what he does for CFR). This blog has NO synergies with my day job. Clients pay for proprietary work and expect me to keep it confidential. In fact, I NEVER mention the blog to prospective clients. The last thing they want is a journalist privy to their internal affairs (the vast majority of people think blogging is a lot like journalism).

Waldo says:

January 6, 2009 at 12:21 am

Interesting note about the deleveraging of these hedge funds: The equity market began its steep decline about beginning October 1st to bottoming on October 10th. A drop of approximately 2,000 points on the Dow (About $2 trillion in value {I think}).

Did the hedge funds at this Oct. 10th milestone immediately initiate selling equities for redemption calls? From my reading the hedge funds began to reel after October 10th? Looks like the hedge funds were a casualty of the sell-off not the intitiator?

Also interesting is how this (Oct. 1 – Oct 10)sell-off affected American voter behavior?

I think the hedge funds did not lead the sell-off but were a victim of it?

Any takers on this idea?

Yves Smith says:

January 6, 2009 at 12:26 am

Well, it does have a teeny synergy. I am sufficiently up on the business news that it does lead to crisper conversations with potential clients. But I have no idea if it ever made enough of a difference to cinch a project.

CTMM says:

January 6, 2009 at 12:31 am

Bah. Troll.

We read because the editorial selection is excellent and the commenting has a high signal to noise ratio.

(there’s also some yves smith fanboy lust, but I won’t go into that part. [marry me?{please}])

bg says:

January 6, 2009 at 12:35 am

Anon 12:03,

We all (most) know this blog is a labor of love for Yves. But it is also important to have a sophisticated and public debate on economic policy.

Yves is influential and relevant, and we are privileged to be part of this. I am not sure why she responds to people questioning her motives, much less responds to people questioning her opinions. But she does, I assume, because this blog matters.

I for one hope she doesn’t tire of us, because there are too few articulate voices of reason.

Consumer Storm says:

January 6, 2009 at 12:38 am

Yves – I love your blog and find it really useful. I was surprised you even responded to the commenter above. Keep up the great work.

Steve says:

January 6, 2009 at 12:39 am

Anon at 2:03 –

What Yves provides on this blog is informed and insightful perspective on issues that are often treated superficially, or public relations style, by the MSM. And she’s not afraid to go up against big names and lay it on the line. I’m thankful to her for sharing her insights for what must be derisory compensation.

ndk says:

January 6, 2009 at 12:43 am

I think the hedge funds did not lead the sell-off but were a victim of it?

Any takers on this idea?

With the amount of assets they once managed, this argument claims like the chicken actually did come before the egg.

I glean from this that deleveraging is most certainly not over, and I am in absolutely no rush to risk myself up again.

A stability in the financial markets introduced by heavy government intervention and lock-up periods, while damage to the real economy accrues, is not a lasting peace.

Anonymous says:

January 6, 2009 at 12:44 am

“Have you ever written an original article for publication?”

Yes. And to tighter standards than any you’ve been accustomed to.

But that aside, it was merely a general question of interest. I was pondering why you (and many other skilled bloggers) exhaust your efforts on analyzing, rather than creating. No offense intended.

Why be a news taker when you can be a news maker?

-going to sleep in Joysee now…

Yves Smith says:

January 6, 2009 at 12:47 am

12:19, CTMM, bg, Consumer Storm, Steve,

Thanks for the vote of confidence and continued interest, and most important, your comments. One of the things that has distinguished this blog is the high quality of comments.

I suppose the reason I fell for the bait (aside from character weakness) is that I have been getting the “all you do is write about news” complaint a lot lately. We aren’t in a period like September/October where the tectonic plates are shifting and big policy moves are being made on a daily basis. The underlying grist is less meaty (thank God, would you like every month to be like October?) and frankly, there are fewer juicy things to talk about when events are less extreme.

Anonymous says:

January 6, 2009 at 12:52 am

Gods, what an arrogant twerp. Do you even know where Yves has written? And a lot of unexpected places have brutal standards. Vanity Fair is famous for how tough its fact checkers are., while peer reviewed journals have been found to be wanting.

Fraud Guy says:

January 6, 2009 at 1:01 am

However, even with general contraction in hedge funds, do you think that managers, similar to the financial firms, will pay “retention bonuses” to various “critical” employees.

I had a friend in the airline industry when everyone was going bankrupt, and the argument was that the executives who were running things during the implosion were valuable because they had gone through the bad times/DIP/reorganization, and other airlines just hitting that patch wanted that experience to help them through the cycle.

Waldo says:

January 6, 2009 at 1:01 am

“With the amount of assets they once managed, this argument claims like the chicken actually did come before the egg.”

Well its a damn coincidence that this hedge fund “show” so positively enhanced the Democrats (President and Congress). Do not forget that to a great extent this whole mess is an anomaly. And as an anomaly every idea may have an impact on discerning the truth.

Another anomaly; this Republican (I) not only voted for Obama, but put “skin” in the game ($).

“And thus in the days ahead, only the very courageous will be able to take the hard and unpopular decisions necessary for our survival in the struggle with a powerful enemy – an enemy with leaders who need give little thought to the popularity of their course, who need pay little tribute to the public opinion they themselves manipulate, and who may force, without fear of retaliation at the polls, their citizens to sacrifice present laughter for future glory. And only the very courageous will be able to keep alive the spirit of individualism and dissent which gave birth to this nation, nourished it as an infant and carried it through its severest tests upon the attainment of its maturity.” John F. Kennedy – Profiles in Courage.

wunsacon says:

January 6, 2009 at 1:04 am

Yves,

I rarely post here. But, I read every one of your posts every day. And I believe I learn from your interpretations of — “value-add” comments on — the recent headlines. (Otherwise, I would simply stop at reading Bloomberg, which I do anyway.)

I also learn from your other readers.

Thank you for sharing.

bg says:

January 6, 2009 at 1:11 am

ndk,

“I think the hedge funds did not lead the sell-off but were a victim of it?”

This seems obvious to me. HF are highly leveraged thanks to the largess of easy money. When there was no oxygen to the fire, the fire became a ‘victim’.

NDK, I also liked your comment yesterday that the worlds manufacturing overcapacity would seem equilibrium by increasing trade barriers until the resulting inefficiencies ’solved’ the underlying problem. I am a hard sciences person too, and we are often drawn to feedback models to explain unwanted second order effects.

bg says:

January 6, 2009 at 1:13 am

“I think the hedge funds did not lead the sell-off but were a victim of it?”

Many of us are envious of your skills, and fall into the mistake of critiquing you, rather than the issues.

Don’t take the bait.

bg says:

January 6, 2009 at 1:15 am

“I have been getting the “all you do is write about news” complaint”

I meant to use that quote…

many of are envious… don’t take the bait.

Anonymous says:

January 6, 2009 at 1:26 am

Yves,

The troll comment earlier reminds me of a recent story you might find interesting.

Back in late September I was so pissed about the talk of bailouts that I made a 10 foot sign reading NO BAILOUTS and talked a friend into holding it up on the highways and byways of Portland Oregon for 4 mornings running. On the first morning one of the local Oregonian writers came and talked to us and I continued to communicate with him for a bit. I sent him a number of links supporting things that I had said to him. One of them was done by devilstower over at Kos and after this paid writer read it he wrote back asking me how it was that someone would write that good of stuff and not use their real name.

The take away for me was that the folks in the fascist led media are starting to be scared because they are quickly seeing their readers go toward better information that is free. While you don’t write all your postings from scratch, the culling and presentation that you provide is awesome. I’ll be hornswaggled if it doesn’t even parallel my thinking and observation.

Ain’t the internet great. We are building the tools to make the world better. Thanks for what you do.

ndk says:

January 6, 2009 at 1:31 am

This seems obvious to me. HF are highly leveraged thanks to the largess of easy money. When there was no oxygen to the fire, the fire became a ‘victim’.

That’s true, but viewing hedgies as a monolithic entity is a strange tendency people have. It’s a very large and diverse group of individuals, firms, and strategies. I have little doubt that there were many funds on both side of the trade, but being net long and highly levered in general does skew the distribution in support of the claim.

NDK, I also liked your comment yesterday that the worlds manufacturing overcapacity would seem equilibrium by increasing trade barriers until the resulting inefficiencies ’solved’ the underlying problem.

Thanks for taking the time to read it! The thanks there go to Rodrik, though. They were just his ideas on loan and elaborated. I really don’t know if I like it or not; it’s a very provocative claim that pulls me in a lot of directions.

I am a hard sciences person too, and we are often drawn to feedback models to explain unwanted second order effects.

Definitely, and have a healthy natural skepticism of all theories, especially our own. I’ve watched too many goods ones fail.

WRT drama above, one of the reasons I consider myself constitutionally unsuited to blogging is that I’m far too emotionally and personally vested in everything I do. You can infer the rest, so I’ll just add my thanks too.

Waldo says:

January 6, 2009 at 1:35 am

Yves,

Count me in. Your little blog has real potential. I find it the most erudite of my readings. This little blog of yours is truly comparable to the Economist (my favorite business journal).

Also, I intend to be the one inputing perhaps the most outlier of philosophies regarding this mess. Should make reading interesting.

Cannot help the outlier mentallity, from SoCal.

Keep up the important work.

bg says:

January 6, 2009 at 1:58 am

“being net long and highly levered”

ndk,

Point taken. I am pretty aware of the different strategies used in hedge funds, but had mentally aggregated them as being net long and highly levered and overinvested in illiquid instruments. I had even further over simplified the model. Like earthquake insurers, they make lots of profit most years, but are not in a position to pay out when the big one hits.

yeah, they are victims, big time.

Waldo says:

January 6, 2009 at 2:12 am

Yves,

Check out this article http://online.wsj.com/article/SB123120164162955677.html?mod=article-outset-box

may be good reading for a topic discussion.

WalrusBank says:

January 6, 2009 at 2:37 am

Check out this info on the agricultural commodities market:

http://changealley.blogspot.com/2009/01/agricultural-commodities-boom.html

…

Gregor/ Germany says:

January 6, 2009 at 2:52 am

C’mon, Yves, since your blogging just for me, could you please wash my car and iron my shirts, too?

Sarcasm off:
I love your work and your perspective is very valuable for me. Thanks for taking the time and the passion.

Richard Smith says:

January 6, 2009 at 5:13 am

Yves,

You are getting that “all you do is write about news” snit from just one hopeless obsessive – he posts mostly as “Dan Duncan” or as “DD”, but when he’s thrown all his toys out of the pram he uses lots of pseudonyms in succession. One in five posts is relatively polite but misguided; the rest are all vituperative attempts to sustain the daft point that editorial and commentary are worthless and parasitical. True of his own attempts in that area, but not generally, methinks. He is some sort of frustrated Svengali I think.

I’ve had a couple of goes at him, since I hate leaving that stuff unchallenged (like you I think), but FWIW I think that arguing with him is probably optional – just as pointless as his own comments, really.

Nice comment about the change in pace of events relative to Sept/Oct. You, if not Paulson, had an incredibly solid playbook together pretty much since this thing started getting nasty in Aug ‘07. Not many commentators managed that, and all by itself it’s enough to make DD’s thesis look a bit lame.

I’m sure that you’ll have it straight when the next bout of ructions start. In the mean time it must look like a matter of sniffing for clues and keeping the fires lit.

vikas says:

January 6, 2009 at 5:45 am

Re: Chickens and eggs

I think the generalised margin call from prime brokers in September had something to do with it.

Anonymous says:

January 6, 2009 at 5:55 am

With so many hedge funds putting up gates, where will this hedge fund selling pressure come from? Presumably they have already delevered enough to satisfy their prime brokers. If they get additional redemption requests, so what? The funds that really screwed up are under no pressure to sell anything. Only the funds that haven’t put up gates will have to sell to meet redemptions from fund of funds and individual/institutional investors looking for liquidity.

Anonymous says:

January 6, 2009 at 6:46 am

Yea, but the news you do cover seems to be left out on most other blogs, or they will do it a day or two later. Your insight is appreciated on this end, by this outsider. Thanks,

JustinTheSkeptic ps, I don’t know about marriage, but lunch would be nice. lol

marc.van.den.bosch says:

January 6, 2009 at 7:49 am

I have to agree with Anon 1:26. Most sources of information (Newspapers, magazines etc) are run like businesses today. What they do is buy news, repackage it and sell it. Finding news themselves and doing a bit of investigation is often too expensive and can lead to a lot of hassle. Because of this, the profile of journalists has changed. They have a much broader and much more superficial knowledge.

Lucky for us the internet has created (next to lots & lots of useless content) also some spaces where news is unfiltered or the filtered news is put in perspective.

Ken says:

January 6, 2009 at 10:54 am

Yves Smith writes: “In the past, when that happened to hedge funds, they often imploded… because the staff decamps…”

I am curiously reminded of the firm whose risk-assessment model did not consider the possibility of house prices declining. Was there any part of the financial industry that used a business model that allowed for downturns?

James says:

January 6, 2009 at 11:49 am

This is by far the most informative finance-oriented blog in existence.

Brava!

David says:

January 6, 2009 at 11:56 am

Yves

There is no need to defend yourself against some idiot.

Your blog is essential daily reading for anyone interested in the world economy.

Keep up the fantastic work!

ndk says:

January 6, 2009 at 12:25 pm

With so many hedge funds putting up gates, where will this hedge fund selling pressure come from? Presumably they have already delevered enough to satisfy their prime brokers. If they get additional redemption requests, so what?

The gates don’t last forever, 5:55, and I don’t think imposing them will encourage investors to stick around. Rather than a single dramatic liquidation, we’ve opted for the water torture, but people are going to want their money out as soon as they can get it.

FairEconomist says:

January 6, 2009 at 1:25 pm

Yves, you’ve stepped on some important toes in this blog. When somebody trolls here, I can’t help but wonder if they’re trying to distract attention from the subject of the post. Hedge funds are already having a lot of trouble at the front door from investors who want their money back while they still have money. Maybe they’re concerned about having back door trouble too from difficulties hiring and keeping personnel. Or maybe Madoff isn’t that last alligator in that swamp and somebody’s trying to muddy the water.

Eric L. Prentis says:

January 6, 2009 at 3:28 pm

Dear Yves Smith:

Who you are, your source selection and tenacity of review, your insight and presentation priorities, and your cogent analysis and reader comments makes “naked capitalism” a joy and required political-economic reading. I give you kudos for your work and invite you to a restaurant for lunch, when you visit Houston.

xxxx says:

January 6, 2009 at 5:36 pm

Yves,

I read your blog daily, although I have never posted before. I appreciate your efforts in both busy and slow news times. Your clients are fortunate to have a person of such integrity working form them.

Sincerely…Ann

KT says:

January 6, 2009 at 5:53 pm

Yves
Like most here, I read daily as well. Your blog has replaced CNBC and BLOOMBERG on my favs list
Insightful commentary, from you and the readers, in some the most important times in the history of this earth
Keep up the great work, and please, as hard as it is, keep up the effort and the good you are doing
Thanks

KT says:

January 6, 2009 at 5:54 pm

Yves
Like most here, I read daily as well. Your blog has replaced CNBC and BLOOMBERG on my favs list
Insightful commentary, from you and the readers, in some the most important times in the history of this earth
Keep up the great work, and please, as hard as it is, keep up the effort and the good you are doing
Thanks

Anonymous says:

January 6, 2009 at 11:50 pm

Commenting informally on the news of the nonce, the “buzz” of the day, appears to be a perfect metier for this blog and its elegant and distinguished hostess, deep in both theory and practice. In the often still juvenile medium of the blog, it is a technique she has elevated into a class of its own. Hers is a salon didactic yet captivating, purposeful while casual, so well embroidered by the theme variations of an unmatched collection of equally enthusiastic commenters. Added to her serenity of mind and lspirit, her easy sophistication, rhetorical panache, dry humor and passion for truth, her work here affords a pithy balance to the MSM consensus mindset. Her multidimensional critique tends to probe both the discourse and its emulsifying filters, sending us off to our quotidian chores with a much clearer perspective on what the hell is going on with our money and our votes. Much appreciated.
JCF

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