Saturday, November 15, 2008

Burnt Hedges

Fancy suits, designer glasses and a personality that perhaps stood out a bit from the crowd. Back in 2007 as the Dow was marching its way to a record 14,000, these were apparently some of the prerequisites for launching a fund according to some folks. Oh yes, there was one more prerequisite: a secret sauce or ‘black box’ strategy to go along with the fanciness. The Hedgies could do no wrong with returns exceeding 25% a year over the past 5 years or so, justifying their exorbitant fees. Bland looking, boring value investors were out of style.

Well, a
Black Swan has swooped in and ripped the Armani suits and the black boxes to pieces. Hedge funds are closing up shop at a rapid pace and more carnage probably lies ahead as redemptions pour in at a furious pace and losses mount. Our own Globe and Mail newspaper has had recent articles about ‘high-profile’ Lawrence Asset Management and Salida Capital which have suffered heavy losses.

To be sure there are those who will come out of this stronger and bigger than before. Steven Cohen’s SAC Capital has managed to raise capital in this environment, a testament to his staying power and superior performance relative to peers. John Paulson’s Paulson & Co. has posted impressive gains amid the turmoil. But the ranks of the Hedgies will be thinner come 2009. Here is a sampling of Canadian hedge funds’ performance as reported by the Globe and Mail in October 2008.

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