The hedge-fund community is in crisis mode after crashing and burning in the aftermath of the global credit crisis. 1861 Capital Management, ASTA/MAT, Tontine Partners LP, and The Ospraie Fund, are just a few of the hedge funds who have suffered a fate tied to investor redemptions and illiquid assets, which ultimately has left thousands of individual investors, charities and pension fund holders facing some huge and unforeseeable financial losses.
The past year has seen hundreds of hedge funds go out of business. In 2008, some 920 funds were shuttered – a figure that eclipses the prior record set in 2005 when 848 hedge funds closed down. On average, hedge funds lost more than 18% last year. The previous worst performance by hedge funds occurred in 2002, posting a loss of 1.5%. In 2007, hedge funds returned 9.9%. As hedge funds literally fought for survival in 2008, many would lose the battle altogether.
Among them: The Ospraie Fund, which posted nearly a 40% loss in2008. An even worse performance came from the Tontine Partners LP hedge fund, which ended the year down an astonishing -91.5%. Other funds such as Tudor Investment Corp. and Citadel Investment Group LLC have been forced to limit investor redemptions or risk implosion. Earlier this month, Citadel, whose flagship hedge fund lost 55% in 2008, announced plans to resume payouts to investors. Investors’ access to their money, however, will occur no sooner than April 1.
Hedge funds that trade municipal bonds also are experiencing a rough time these days. As reported Feb. 29, 2008, by MarketWatch, problems with bond insurers and other disruptions borne out of the global credit crunch have pushed yields on municipal bonds close to, or above, those of comparable Treasury bonds. For hedge funds that try to make money from the difference, called the spread, between the yields, the end result translates into the likelihood of margin calls.
That’s exactly what happened to hedge funds like Citigroup’s ASTA/MAT hedge funds. In using a municipal arbitrage strategy, the funds ultimately were forced to sell their positions at fire-sale prices, causing significant losses to investors. The dismal performance of hedge funds has continued into 2009. One of the most recent hedge funds to shutter is the Highland CDO Opportunity Fund, which encountered massive losses from its holdings of high-risk collateralized debt obligations (CDOs). In October, similar circumstances forced Highland to close two other hedge funds: the Crusader Fund and the Credit Strategies Fund.
The shocking upheaval in the hedge fund industry is casting new light on the largely unregulated world of hedge funds. Registration with the Securities and Exchange Commission (SEC) is done on a voluntary basis only. At the same time, investments in hedge funds have grown astronomically. At their peak, approximately 10,000 hedge funds managed nearly $2 trillion in assets. Today, the figure is closer to $1 trillion.
According to Senators Chuck Grassley and Carl Levin a new bill introduced to the Senate has been designated to improve the carelessness and transparency of the hedge fund industry. Introduced on January 29, 2009 the Hedge Fund Transparency Act of 2009 (S. 344) would make it mandatory for hedge fund managers to register with the SEC and open up their books to government examiners. Following their original statement Senators Grassley and Carl Levin also described the bill as an “attempt to address securities law loopholes that enable hedge funds to operate under a cloak of secrecy.”