Bad Bets and Accounting Flaws Slam Hedge Funds

Mark S. Fishman was a modern prince of the markets — a pedigreed money manager who raised billions of dollars at the height of the hedge fund boom.

But last week his dream collapsed. Hobbled by bad trades in the credit markets, Mr. Fishman began to shut the fund he helped found, Sailfish Capital Partners, which oversaw $2 billion just six months ago, investors said.

AP

On Monday Mr. Fishman, 47, sat in the paneled Princeton Club of New York, explaining what it was like to battle the markets — and lose.

“It feels like someone has died,” Mr. Fishman said, his eyes welling up. “We’ve disappointed people, and there is no one more disappointed than me.”

Mr. Fishman is not the first hedge fund manager to run into trouble — and he certainly will not be the last. After years of explosive growth, this secretive, sometimes volatile corner of the financial world is entering a dangerous new era. The running turmoil in the markets is stirring fears that more of these funds will fail, some, perhaps, spectacularly.

“This will be the year with the highest number of hedge fund failures given the huge number of new and untested hedge funds,” said Bradley H. Alford, founder of the Atlanta-based Alpha Capital Management, an investment advisory business.

“Last year there were some easy trades: short financials, short subprime, long non-U.S and emerging markets. This year there’s no clear trend and no safe place to hide.” So far few funds have suffered the same fate as Sailfish Capital. But the signs are troubling. The average stock-picking hedge fund sank 4.1 percent in January. While that tumble was not as steep as the one taken by the broad stock market — the Standard & Poor’s 500-stock index was down 6 percent — it nonetheless represented the hedge fund industry’s worst showing since November 2000. Few of the investment strategies employed by these funds made money.

Big-name funds are suffering. David Slager and Timothy R. Barakett, who run the Atticus European Fund, lost more than 13 percent, and Lee Ainslie, who heads Maverick Capital, lost 9 percent through Jan. 25, according to SYZ & Company, which tallies hedge fund returns. (Compare that with 2007 performance when the funds returned 27.7 percent and 26.9 percent, respectively.)

Even Goldman Sachs, which turned out record profit last year while many other Wall Street banks stumbled, is struggling to make money for its hedge fund investors. Its $7 billion Goldman Sachs Investment Partners fund, started on Jan. 1, fell 6 percent last month.

Press officers for Atticus and Goldman declined to comment. A spokesman for Maverick could not be reached.

“People who have been in business for 20 years are saying January was one of the most difficult and challenging times they have ever seen,” said a manager who oversees a fund of hedge funds, who asked not to be identified because he does business with many managers.

It is a remarkable turnabout for an industry that upended the old order on Wall Street and, in the process, redefined Americans’ notions of wealth. In recent years hedge fund money has driven up prices of everything from New York apartments to Andy Warhol paintings and reshaped the worlds of philanthropy and politics.

Managing a hedge fund has become the running dream on Wall Street. Since 2000, the number of funds has more than doubled, to 10,000. These private pools of capital now sit atop almost $1.9 trillion in assets.

Until recently, times in the industry were good, very good. On average, so-called long/short hedge funds — those that bet on some stocks and against others — returned 10.51 percent in 2007, according to Hedge Fund Research. The Standard & Poor’s 500, by contrast, returned a mere 5.49 percent, including dividends.

But making money is getting tougher. Many hedge funds are products of a bull market. Many profited by making leveraged bets on what were, until recently, steadily rising markets. Some plowed into emerging markets while others dove into the loan market. But now, as the credit squeeze tightens and talk of recession grows louder, those same markets have collapsed.

Sol Waksman, president of Barclay Group, an alternative investment database, said that three-quarters of the 1,241 hedge funds that have reported returns for January lost money.

“That’s a scary number,” Mr. Waksman said.

Many managers fear things will only get worse. The mood was bleak at a hedge fund conference given by Morgan Stanley recently at the Breakers resort in Palm Beach, Fla., according to people at the gathering.

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