News analysis: Defending a sinking reputation

The near-collapse of Long-Term Capital Management has tarnished the image of hedge funds

NOT ALL hedge funds are highly leveraged monsters lurching out of control.

Although most of them have been hit by the global financial crisis, 13 of the top 20 funds, including some of the biggest, are still showing gains - this in a year when a fund manager investing in UK or US stocks would have seen all their gains wiped had they performed in line with their respective indices.

Some hedge funds, such as Julian Robertson's Tiger Fund, which takes big bets on global market trends, are actually ahead on the year, and faring better than conventional fund managers.

Mr Robertson is up 30 per cent in the year to August and still 19 per cent ahead today.

PDF, a smaller fund run by the little-known Peter Putron in London, which took out sell options in Dresdner Bank shares, has performed particularly well. Dresdner lost badly as a result of Long Term Capital Management's crisis and its shares fell sharply.

While there are fears that some hedge funds are close to collapse, senior bankers involved in the Long Term Capital Management bail-out say they are too small to wreak the havoc that Long Term Capital Management would have done had it gone down.

Blair Tomlinson, a former bond dealer now observing from the sidelines at London-based consultancy Financial Risk, says: "Hedge funds, as a group, do not pose a systemic threat. There is no-one out there who compares in size or leverage to Long Term Capital Management."

But even he admits: "That does not mean somebody out there won't go under."

Paul Tudor Jones, the manager and former cotton futures trader who has done relatively well, finds it irritating to see all hedge funds tarred with the same brush.

Likewise Warren Mosler, who runs his III Opportunities stable of funds from West Palm Beach in Florida, has accused banks of actively trying to close him down.

But if hedge fund managers complain they are misunderstood they have only themselves to blame.

George Soros, the well-known hedge fund manager, famously told a Senate committee that regulators had no right to poke their nose in a business that clearly was not designed for widows and orphans.

There are three main types of hedge funds:

l Equity long-short: not unlike conventional stock-picking fund managers except that they short stocks they don't like as well as buying ones they do, and seek to balance their bets overall. Some of these have done well this year although whether that is sustainable in a long-term bear market is a moot point.

Speculators (often called global): these tend to be governed by the manager's view of global political developments and are more sensitive to political upsets such as changes in government.

They tend to invest in instruments such as currencies and bonds. This "trust me I know what I am doing school" is best exemplified by Julian Robertson's Tiger Fund and George Soros. Investors are invited to follow the cult.

Market neutral: so-called because they aim to make money irrespective of the general market movement by exploiting discrepancies between markets. Long-Term Capital Management was the biggest in the game. Its speciality was arbitrage of large holdings of fixed-income bonds. It was also the most highly leveraged of all the funds. Not surprisingly highly-leveraged fixed-income specialists are the ones most seriously at risk.

What attracts many of the brightest fund managers to hedge funds is the freedom to borrow what they like, trade what they like, and even to wear what they like. Open-necked shirts are the rule.

But the controls they chafed against in their previous jobs were there for a reason. Managers often say one thing and do another.

Hedge fund manager John Meriwether was notorious for not telling his investors what he was doing with their money.

As one wealthy individual who declined the offer to put the minimum stake of $100m into Meriwether's care says: "What scares me is that these people charge you 20 per cent if they make profits and give you nothing back when they lose money."

Bond funds played the US stock market earlier this year, and almost everyone played the yen carry game, whereby you borrow cheap yen to buy high yielding bonds elsewhere. But the big danger is not so much gearing as hubris. "People forget that in the last downturn Goldman Sachs saw its capital wiped out. These guys are only as good as their last deal. But they they all have the capacity of not living up to their reputation."

News
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
science
News
Richard Dawkins dedicated his book 'The Greatest Show on Earth' to Josh Timonen
newsThat's Richard Dawkins on babies with Down Syndrome
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
Extras
indybest
PROMOTED VIDEO
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Travel
Dinosaurs Unleashed at the Eden Project
travel
Arts and Entertainment
music
Sport
football
Life and Style
This month marks the 20th anniversary of the first online sale
techDespite a host of other online auction sites and fierce competition from Amazon, eBay is still the most popular e-commerce site in the UK
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

AIFMD Business Analyst / Consultant - Investment Management

£450 - £600 per day: Harrington Starr: AIFMD Business Analyst / Consultant - I...

Business Analyst Solvency II SME (Pillar 1, 2 & 3) Insurance

£450 - £600 per day: Harrington Starr: Business Analyst Solvency II SME (Pilla...

Day In a Page

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home