The scary stuff that you'll see this Halloween is nothing compared to this
Boo! Ghouls, Goblins, Monsters, and Ghosts are just a few of the scary things that we will see this Halloween, but they are not nearly as scary as this...the recent performance of a ton of huge hedge funds. This is why I have shorted all of the public ones that I am aware of Blackstone (BX), Fortress Investment Group (FIG), and Och-Ziff Capital Management (OZM) in CAPS. The latter two's returns weren't even that great during good times. I can't imagine how bad they are now. These guys are going to get absolutely destroyed when scared investors come looking to get their money back.
On the positive side, once crowded trades and miniscule risk premiums are becoming much more attractive for investors like you and I as these funds are forced to sell everything. I have begun to see safe dividend yields and merger arbitrage spreads that are more attractive than I have ever seen in my life.
It is often difficult to find out just how poorly some hedge funds are performing if one isn't an investor. Interestingly, HSBC recently published a review of the hedge funds that it is invested in.
So what was the worst performing fund that HSBC is invested in? The 788 China Fund, which was posted top 20 returns in both 2006 and 2007 is off so far 88.1% in 2008. I have a strong feeling that forced liquidation by funds like this is part of the reason that we are seeing such amazing bargains in China right now.
Other funds with terrible performance include:
Boyer Allan Pacific Fund: -43%.
Daniel Loeb's Third Point Offshore: -21.3%
Mark Kingdon's Kingdon Offshore A/1: -19.9%
Leon Cooperman's Omega Overseas Partners Class A: -22.4%
Jim Simons' RIEF LP B: -23.5%
I saved the best for last:
John Meriwether's Relative Value Opportunity II Fund: -26.1%
For those of you who are not familiar with him, Merriwether was the head of the infamous massive Long Term Capital Management hedge fund that caused so much market turmoil when it blew up in the late 1990s. HOW IN THE HECK DID THIS GUY CONVINCE PEOPLE TO GIVE HIM MONEY TO START ANOTHER FUND?!?!?!?! He must be able to sell snow to the Eskimos. I personally would rather give money to my paperboy or even Charles Manson to start a fund. As least neither of them were responsible for the largest implosion of a fund in history.
Earlier this year I read a fantastic book on this subject by Roger Lowenstein called When Genius Failed. The blinding greed that the operators of this fund exhibited is a microcosm of how we got into the current mess that we find ourselves in. It's a great read.
The Good, The Bad, The Ugly