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The past several years, the most valued people in our society were those who could make money from money. They weren't cancer researchers or astrophysicists. They weren't even NBA players or movie stars. They were hedge fund managers.
Last year, five of them made well over $1 billion each. They scored, in part, by charging enormously high fees to investors who felt lucky just to be in business with them.
The air of mystery that surrounded hedge fund managers -- aided by their unregulated status and in some cases their black-box investing techniques -- seemed only to bring in more money.
So much for that. The hedge fund mystique died with the crash of 2008.
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Youthful traders and big shots from investment banks won't soon be given billions to invest based on their résumés. Mystery and opacity will be a negative, not cause for reward. Regulators, one hopes, are unlikely to again ignore an industry that, under their noses, grabbed at its peak nearly $2 trillion to manage.
As many as half the funds that existed earlier this year, when the industry topped out at 10,000 funds in business, could fail or be wound up in a year's time, industry watchers estimate.
Assets under management at hedge funds are falling as investors rush to pull money out of good funds and bad. Investors took out an estimated $40 billion from the sector in each of the past two months, the largest outflow of money since experts began tracking numbers.
Washington is gunning for the industry. In a now-infamous memo, disgraced Lehman Bros. (LEHMQ, news, msgs) chief Dick Fuld reported disapprovingly that Treasury Secretary Hank Paulson wanted to "kill the bad (funds) and regulate the rest." Regulators may soon have the chance.
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Many of the industry's stars have been crushed. Tontine, a fund run by Jeff Gendell, one of the hot Greenwich, Conn., managers, was down 65% through September after a less than stellar 2007. Phil Falcone's Harbinger had more than $20 billion under management after its main funds were up 116% in 2007; it was up 40% in the first half of 2008, before that gain was almost entirely wiped out in the third quarter. Steve Mandel's legendary funds -- among the so-called Tiger Cubs spun out of investor Julian Robertson's company -- were off between 23% and 31% this year through September.
Two funds run by onetime hockey player Tim Barakett's Atticus were down 25% and 33% this year, and their assets under management fell by $5 billion, to $15 billion.
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Billionaires on paradeA congressional panel recently summoned five prominent hedge fund operators to grill them on whether big, undisclosed risks could threaten the financial system.
Many fund managers knew this day would come. They just thought it would happen to the other guy.
Cliff Asness, a hedge fund manager and finance scholar, cautioned repeatedly in recent years about the faddishness of hedge funds. In 2004, he concluded, "The hedge fund structure does not create investing skill out of thin air . . . and the tools that hedge funds use (leverage, short-selling, and derivatives) certainly come with risk."
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