Some elements of the financial media might have you believe hedge fund managers are, to quote Tom Wolfe, "masters of the universe." However, some recent blunders, particularly in the hedge-fund departments of the large investment banks, say otherwise.
No firm encapsulates a golden-egg-laying machine on Wall Street more than Goldman Sachs. Yet for all of Goldman's financial muscle, its own flagship hedge fund has recorded awful results over the past year and a half.
Dubbed the Global Alpha Fund, Goldman's largest hedge fund had lost 3.4 percent through the first four months of the year and is down 12 percent since the end of 2005, a period in which the S&P 500 climbed 22 percent.
The recent showing is a significant setback from 2005, when Global Alpha notched a 40-percent return and collected $700 million in fees. The strong performance that year helped Global Alpha rake in $3 billion of new money-which for those late-to-the-party investors hasn't worked out so well.
Last month, UBS, the Swiss financial giant, shocked Wall Street by shutting down its Dillon Read hedge fund. The fund, which started only two years ago, suffered losses in the subprime mortgage fiasco earlier this year. Observers also point to a cost structure at the hedge fund that was out of line, as Dillon Read was paying its 250 employees bonuses averaging $1 million a year. UBS says it will cost the firm $300 million to pull the plug on its hedge fund operation, on top of the $122 million first-quarter loss posted by Dillon Read's investments.
Citigroup, the global financial powerhouse, has struggled for years with its Tribecca Global hedge fund operation. Beginning in 2004, the firm spent more than $100 million hiring employees and on technology infrastructure (the big hedge funds can't manage money without splashy, state-of-the-art trading floors). But the fund has had trouble attracting outside investors with an investment performance that was flat through most of 2006.
After firing the past two heads of the division, the bank abandoned its in-house strategy and in April bought Old Lane, a $4.5 billion hedge fund, for the nosebleed price of $800 million. Formed in late 2005, Old Lane has not exactly set the world on fire with its performance, registering a mere 6-percent return in 2006.
Beyond the investment banks, there have been other high-profile hedge fund stumbles. John Henry, the longtime commodity trader and owner of the Boston Red Sox, has big problems. Several investment funds managed by John Henry & Co. have lost anywhere from 20 percent to 38 percent in the last year. Clients have been pulling money out, with Merrill Lynch yanking $600 million at the end of May. One report showed that an investor in the firm's flagship fund launched in 1996 would have done better in an index fund, thereby avoiding the notoriously huge fees hedge funds charge.
And then there is Ritchie Capital, an Illinois-based hedge fund run by former pro football player Thane Ritchie. The hedge fund got caught up in the natural gas trading mess when Amaranth hedge fund lost $6 billion back in August 2005. Investors who are trying to withdraw their money from the fund have been prevented from doing so because the fund holds a number of illiquid investments.
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or firstname.lastname@example.org.