Where Are The Big Hedge Fund Failures?

Posted by Bull Bear Trader | 9/18/2008 09:22:00 AM | , , | 0 comments »

There is an article in the Times Online asking the question of why we are not hearing about more hedge fund failures as the current credit crisis has intensified over the last few weeks. The author believes the reason is that the current problems are due less to a credit crisis problem and more to an ownership problem - the real problem is the divergence between listed companies and their dispersed shareholders. While hedge funds have done poorly, and some will no doubt fail as a result of the current market issues, the numbers to date are not much different than normal attrition in the industry. Since hedge funds are private partnerships, it is believe that they will therefore continue to not have the same ownership problems that are plaguing the market.

Of course, besides ownership differences, hedge funds also have some other unique attributes. For one, hedge funds can keep their investors from withdrawing money, unlike listed companies. A run on the fund is less likely, at least right after a major event, unlike shareholders of listed companies who can sell their shares in mass right now. Also, hedge funds do not have to publicly mark-to-market all their assets and disclose all their underwater positions, allowing them to hold positions that may currently have irrational prices. Many (not all) also seem to take hedging and risk management into consideration, or at least are able to use their flexibility to respond to the market a little quicker. Some hedge funds will no doubt fail as a result of the current issues in the market, but I suspect that poor risk management, poor decisions, over-leverage, greed, stupidity from numerous stakeholders, and the inability to ride out the storm (due to mark-to-market or other liquidity issues) have more to do with recent failures than ownership issues.