By Neil Wilson
The extraordinary events of recent weeks have tested not only
the mettle of hedge fund managers, investors and service
providers to the limit, but also the creativity of headline
writers. And by now you might be thinking all those "market
meltdown" clichés must have been exhausted.
Maybe you should think again - because I have been musing on
yet more clichés, ones that would most appropriately
describe what has been happening to hedge funds in this
tumultuous period. I have been pondering such clichés
as: shooting the messenger, witch hunt, and of course, night of
the long knives.
While all those expressions may well suggest where hedge
funds stand today, I think another I heard recently sums up the
situation most aptly. And that is? Collateral damage.
The term came up in a discussion I had recently with someone
doing battle to uphold the industry's cause among regulators
and lawmakers. While markets were calm, this source told me, it
had been possible to get them to listen to sound arguments
about the benefits hedge funds bring - such as providing
liquidity, cooling overheated markets, exposing corporate
frauds and generally enhancing the efficiency of capital
"But when the top priority - maybe the only priority - is
salvaging the financial system itself, then most of them
suddenly don't want to listen," I was told. "Their attitude is:
If a few hedge funds go down in the process - even if a lot of
hedge funds go down in the process - then so be it. That's just
collateral damage. If the system itself is saved, then that is
all that really matters."
Of course, that is very unfortunate for many hedge funds -
and completely unfair. Perhaps it is possible to change that
mind-set - if the powers that be eventually conclude that hedge
funds are not part of the problem but part of the solution. I
think that is a battle that can still be won.
But in the meantime, there is a nasty feeling of retribution
in the air. Hedge funds have generally done well in recent
years, much better than traditional managers. And now it feels
uncomfortably like payback time - a chance for the old,
established institutional world to take the hedge funds down a
peg or two.
In this new world of plunging markets, fearful counterparty
relationships and much more expensive leverage, it seems
certain many hedge funds will go out of business - all around
the world. Among Asia-Pacific funds, the number of shutdowns at
midyear was already running ahead of the number of startups,
and at least 68 had closed their doors by October. The
attrition rate has been rising fast in Europe, too.
With so many funds now far from high-water marks and hit
with redemptions, the shutdown rate seems certain to spiral.
Nobody knows how many funds will ultimately go, but it seems
likely at least 15% will go in the near future.
Speaking at the AsiaHedge Forum recently in Hong Kong,
Marshall Wace co-founder Paul Marshall said that perhaps as
much as 40% of the industry will disappear. But then, to a
sharp intake of breath from the packed hall, he added: "This is
of course great news."
It is harsh, perhaps. But destruction like we are now
witnessing does create opportunity - for those who survive. And
what is even better news, Marshall argued, is the likelihood
large-scale competition from proprietary trading desks of the
investment banks will disappear, too. The end result of all
this, he argued, will be a world of less competition - as well
as, arguably, more opportunity than for a generation.
During the same week, AsiaHedge held its seventh annual
awards event - proving that, despite a subdued mood, a number
of big players had still done really well in the region over
the past year. These included the winner of the Best Management
Firm award, Gartmore Japan of Tokyo, as well as the Brevan
Howard Asia macro fund and Dragonback multistrategy funds
managed out of Hong Kong, and the Artradis Barracuda volatility
arbitrage fund managed out of Singapore, which took the top
award for Fund of the Year.
Within days, the $4 billion-plus Artradis group proved
Marshall's point - announcing plans for a new $500 million
convertible fund, which aims to take advantage of the huge
opportunities in the bombed-out CB market and which the team
says it can exploit (initially at least) without any leverage.
Whether Artradis will be the best placed to exploit the new
opportunities is yet to be proved. But new opportunities are
coming. And hedge funds can - and I think will - play a major
role in resolving the serious problems of the global