By Niki Natarajan
I Am Legend, the 1954 science fiction/horror novel by Richard Matheson about the last man alive in Los Angeles facing a plague of the undead, could very easily be re-set in modern day Manhattan Midtown or London's Mayfair about the last hedge funds and funds of funds standing.
The subsequent movie was influential in developing the zombie genre and popularising the concept of a worldwide apocalypse due to disease (read: greed), and in exploring the notion of vampirism (aka hedge fund replication) as a disease.
Recently, billionaire hedge fund investor George Soros warned that bailing out banks could turn them into "zombies" that suck the lifeblood of the American economy.
A zombie bank has an economic net worth of less than zero, but continues to operate because its ability to repay its debts is backed by the expectance of government bailouts.
The term was first used by Edward Kane in 1987 and applied to the emerging Japanese crisis in 1993.
But today, like a scene from George Romero's 1968 film Night of the Living Dead, the sinister global zombie invasion has taken a gruesome turn and infected the hedge fund industry. Hedge funds - and in particular many multi-strategy managers - have been bitten by the deadly virus that turns a once high octane hedge fund into a zombie fund.
Funds of hedge funds have been battling against multi-strategy single managers for many years, with the latter winning on the basis of fees until the fall of Amaranth Partners.
Even then, the invasion of the multi-strategy asset snatchers continued as amateur consultants directed client assets to single manager multi-strategy funds. In truth, the single manager multi-strategy universe is much smaller and therefore easier to research than the 2,870 active funds of funds managed by 700 management companies that can be found in the InvestHedge Database.
But like the shell banks in Japan in the early 1990s, many of the previously most impressive multi-strategy hedge funds such Farallon, Stark, DB Zwirn and Citadel are now sitting on inactive side-pockets and gated investments in what looks in some cases like the veneer of a viable business. Activist investors such as TCI are also stuck with zombie portfolios that seem to be struggling to come back to life right now.
The horror continues to infect the industry. Large (or lazy) funds of funds that parked assets in multi-strategy managers are now also paralysed with gated or side-pocketed multi-strategy investments in their portfolios.
For the first time since the invasion of the single manager multi-strategy funds, the few remaining viable, healthy, alpha-adding multi-manager funds of funds are finally seeing a clearer playing field where clients will (hopefully) be able to see the best of their true talents.
Funds of funds that have survived the post-credit crunch, Lehman and Madoff world, without hiding their infection in bandages, are funds of funds with strong manager selection genetics, boosted by the ability to continue defending themselves with a tried and tested due diligence immune system.
Whether or not this new world will see the death of the multi-strategy fund or whether their paralysis will be cured by another dose of beta antibiotics remains to be seen. But for now, some institutionally sound multi-managers such as Och Ziff seem set to survive. If they ever try to take over the fund of funds world again, the story will be the same but different - as is the 2007 remake of I Am Legend, starring Will Smith.