Hedge funds need to find out better ways to say sorry

COMMENTARY

Investors in hedge funds might have expected to beat the market in exchange for a management fee of 20 per cent of the profits.

If that was too much to ask for they should have been safe in the thought that the word ‘hedge’ had something to do with preserving their capital when the economy turned rough.

At the very least, they should have expected a decent excuse when it all went so wrong.

Unfortunately, they have been disappointed on all three counts — and perhaps most let down on the third. As hedge funds, including GLG Partners and Man Group, have turned in miserable results, the excuses have been shameful.

Lame, evasive and unimaginative. Schoolboys, who were too busy playing to finish their math homework, have come up with better reasons for failure than the multimillionaire money managers of London and New York have offered.

We have seen “truly historical events”, Noam Gottesman, chairman and co-CEO of GLG Partners, said in his results statement this month. Those, presumably, would be the events that pushed GLG’s share price down to less than $3 now from over $14 last year.

The markets have “witnessed unprecedented levels of turmoil”, Peter Clarke, CEO of Man Group, said while unveiling a 25 per cent decline in net income. The company’s shares are valued around 210 pence now compared with a high of 626 during the past year.

Managers at RAB Special Situations, meanwhile, seem to think the slight drop in its share price — less than 25 pence now from 111 pence in May — is all someone else’s fault. “This has been a difficult period for the company and economic markets generally,” Quentin Spicer, a company director, said as he presented its results.

For men on salaries that would fund a small nation for a couple of years, this is a ‘dog-ate-my-homework’ level of apology. It simply won’t do.

There are three reasons why the explanations the fu-nds are offering for their poor performance are so inade-quate. First, there is no point telling us things we already know. Even the dippiest airhead must be aware the markets have been turbulent the last few months. Sophisticated investors in hedge funds certainly know about it. Of course, the markets have been turbulent. It’s an observation, not an explanation.

Next, please don’t tell us about the “opportunities” the markets now present. We already know that when prices have fallen 80 per cent in some places, it’s often a good time to buy. What we are also aware of is that the “opportunities” would be rather more compelling if we had hung on to our capital instead of giving it to a bunch of hedge-fund managers.

Lastly, quit telling us these events are “historic” or “unprecedented”. So far, this doesn’t count as the worst bear market of the past 10 years, never mind the last century. The S& P’s 500 Index more than halved in value in the first two years of this decade. The S&P has lost about 40 per cent this year.

That makes it a run-of-the-mill bear market — an event about as “historic” or “unprecedented” as a few rainy days in November. If it is news to anyone that markets are volatile, they shouldn’t be allowed near money-management at all.

The first step toward fixing anything is to start acknowledging the problem.

Any hedge fund down over 20 per cent this year should be willing to explain why it didn’t see the crisis coming. After all, it’s not as if there wasn’t plenty of warning. Everyone had been discussing the credit crunch for months before equity and commodities started to tumble.

Most importantly, a hedge fund should explain how it plans to avoid making the same mistake again. There isn’t much point shrugging and complaining about volatility. The markets will always be volatile. The point is to make that work for you.

And if you can’t do any better than make some money when the markets are up and lose it when they are down, you don’t deserve a 20 per cent performance fee. Anyone can do that. And some might even have the decency to apologise when they get it wrong.

(Matthew Lynn is a Bloomber New columnist)