Even the most shielded hedge funds could not escape the inherent damage of the credit crisis. The $2 trillion vehicles for money-making, regardless of the market’s ups and downs, are being brushed away as the financial world continues to falter.
Hedge fund manager’s payouts are shrinking, according to The New York Times. In recent weeks, several major funds have faltered. While numerous funds are still doing well, the average hedge fund has lost more than four percent this year, according to Hedge Fund Research. The industry is slated to have its worst year ever.
Investors are rethinking their investments or demanding lower fees from managers, who normally collect two percent and then take a 20 percent cut of any profits.
“Everyone is looking for a panacea, everyone is looking for a quick way to make money fast, and everyone is pinning their dreams on the backs of these hedge funds,” Dan McAllister, the treasurer and tax collector of San Diego County told the NYT. His pension fund lost money when a hedge fund called Amaranth collapsed two years ago. “But maybe it’s time to be a little cautious, and it’s time to look at things with a more discreet eye.”
With Wall Street banks like Lehman Brothers struggling for survival, investors are realizing that markets are becoming less predictable and costs are rising. It is now five to 10 percent more expensive for hedge funds to borrow from banks than it was a year ago. When banks do lend the cash, they do so for shorter periods of time.
Fund managers are planning for sharp declines, already slashing employee bonuses in December, according to Glocap, a hedge fund recruiting firm. Heidrick & Struggles, a recruiting firm, has 100 hedge funds on its watch list and expects 50 to 80 to fail in the coming months, said Tim Holt, the partner who oversees the firm’s Wall Street recruiting, in an interview with the NYT.
Money invested in the first half of 2008 is just under $30 billion, a significant decrease from the $118 billion raised in the first half of 2007, according to Hedge Fund Research. The numbers are expected to continue to decline.