Commentary by Matthew Lynn
Nov. 18 (Bloomberg) -- Investors in hedge funds might have expected to beat the market in exchange for a management fee equaling 20 percent 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 Inc. and Man Group Plc, have turned in miserable results, the excuses have been shameful.
Lame, evasive and unimaginative. Schoolboys who were too busy playing PlayStation 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-chief executive officer 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 more than $14 last year.
The markets have “witnessed unprecedented levels of turmoil,” Peter Clarke, chief executive officer of Man Group, said while unveiling a 25 percent decline in net income. The company’s shares are valued at about 210 pence now compared with a high of 626 during the past year.
‘Difficult Period’
Managers at RAB Special Situations Co., 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 that the funds are offering for their poor performance are so inadequate.
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.
Time to Buy
Next, please don’t tell us about the “opportunities” the markets now present. We already know that when prices have fallen 80 percent in some places, it’s often a good time to buy. We can read the collected works of Warren Buffett as well as the next person. 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 Standard & Poor’s 500 Index more than halved in value in the first two years of this decade. The S&P has lost about 40 percent 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 the markets are volatile, they shouldn’t be allowed near the money-management business.
Rather than just deflecting the blame, how about some honesty instead? The first step toward fixing anything is to start acknowledging what the problem was.
Credit Crunch
Any hedge fund down more than 20 percent 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 commodity prices started to tumble.
Managers should say what markets they were invested in and why. If you stuck with oil at $120 a barrel, for example, what made you think it wasn’t a bubble just waiting to burst?
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.
Maybe a hedge fund should even consider winding itself up, and handing the money back to its investors. After all, there is no better way of saying sorry than clearing up the mess you have made and quietly departing the scene.
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 percent performance fee. Anyone can do that. And some might even have the decency to apologize when they get it wrong.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.
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