One sign that the credit crisis is accelerating: Nouriel Roubini’s forecasts are coming to fruition faster.
In the past, Roubini has too often played the role of seemingly mad prophet in the wilderness until he is proven correct. His calls that the housing bubble would collapse in a nasty way, that subprime was most certainly not contained, that Freddie and Fannie would get in trouble, that total credit crunch losses would reach $2 trillion, all sounded apocalyptic and were generally ignored, to the detriment of those who failed to take heed.
The time between Roubini making a dire forecast and it coming to pass has just collapsed. From yesrday’s Financial Times:
The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.
In today’s Independent (recall that London is an even bigger hedge fund center than New York/Fairfield County):
Hedge funds could have an unprecedented level of cash pulled out by investors this quarter, according to insiders, just as they faced millions of pounds of losses from last week’s shock regulation of short selling. It has been a tough year for the industry with high-profile funds blowing up, clients increasing redemptions, as well as public fury over short selling and increased threats of regulation.
One hedge fund expert pointed to The Hedge Fund Implode-O-Meter (HFI) as how he judges the state of the industry. The HFI was set up online in the wake of the credit crunch “to track as hedge funds learn the double-edged-sword nature of the often extreme leverage they use”.
The group’s “imploded funds” list has hit 51 companies…..It has 34 stocks on its “ailing/watch list” of those that have suffered significant value declines or temporarily halted redemptions. According to EuroHedge, a hedge fund data provider, 272 individual funds strategies were launched during the first six months of 2008, the lowest for nine years. In the same time, 243 funds have been liquidated, the highest in a six-month period…
The redemptions seem to have started in earnest, although currently the evidence is mainly anecdotal. One UK hedge fund manager confided that last week had the highest number of investors rushing to withdraw funds that he has known. The industry will know for sure whether it is a drip or a deluge when the data providers release their statistics for the third quarter, next month. One market analyst said: “I know even the good hedge funds have been suffering withdrawals recently. Investors are very nervous.”
Performance numbers are also under pressure. Some have done well out of the market disturbance, but on average the performance numbers are at a low ebb. Andrew Baker, the deputy head of Aima, the hedge fund trade body, said: “The performance is undoubtedly soggy. There are not many strategies that stand out.”
Yves here. Note that short strategies had been a lone bright spot, But now that short sellers are being pursued with a vehemence that would warm Torquemada’s heart, let’s just say that their past results may not be indicative of future performance.
EuroHedge revealed that strategies that have done particularly badly this year include several run by Naissance Capital, once bankrolled by the Habsburg families, which are down a fifth and Pico Fund, which is down 32 per cent. At Endeavour Fund, set up by former Salomon Smith Barney traders, the second fund has fallen by 40 per cent, while its third fund is down 38.79 per cent in 2008. In the emerging markets, PharmaInvest Fund’s investments in emerging markets are 38.16 per cent down.
Other funds have sought to lock in investors by halting redemptions. The latest example was RAB, with its flagship Special Situations Fund, as it was so desperate to prevent exits after a 22 per cent drop in performance that it offered vastly reduced fees in return for a lock-in period of three years.
One of the main problems experienced by hedge funds is the extent of leverage in the industry. The funds were able to take on huge amounts of debt, with little capital needed as security, to boost returns. One observer said some of the leveraged strategies were like “picking up pennies in front of a steamroller, and that only takes a turn in the market to cause severe problems”…..
At the same time, hedge funds, like the banks, have had to write down exposures to investments in risky instruments including collateralised debt obligations and asset backed securities, and also been exposed to the huge swings in the market.
Another issue is the regulators sniffing around. There have been wider calls for transparency and official controls of the industry, which has already been stung by the shock short-selling rules…
Stuart McLaren, financial services partner at Deloitte, said: “When the dust has settled, I expect the regulators to look at the role that hedge funds have played in the current issues. I expect there will be increased calls for regulation, but I doubt much will come from it.”
17 comments
Comments are closed.
i always figured the ultimate irony of the “sub-prime mortgage crisis” would be the collapse of the greenwich, ct, commercial/office/residential real estate markets.
If you just planned your investment strategy around what Nouriel Roubini
has said will happen you would have done and in my opinion will continue to do extremely well. He’s a regular genius and my hero. Well kinda…
Matthew Dubuque
I like many things about Roubini. It must be mentioned though that he was reporting Paulson’s bailout very favorably UNTIL Yves posted a scathing critique of it.
Roubini then publicly criticized the plan and one of his principal arguments was a citation to her pointed criticism that the notion of a Treasury czar being completely without supervision or oversight presiding over all this had no relation to democractic processes and traditions.
ONLY THEN, after Roubini changed his tune, did it suddenly become acceptable for others to do so as well.
I think the foregoing is a competent and rational view. I may be mistaken, but the inferences can be logically and easily drawn from several data points.
What Yves posted here about massive hedge fund redemptions is consistent with my view, expressed earlier today, that a non-trivial portion of today’s selling in stocks was related to hedge fund liquidations taking place five days after the margin calls that went out after last week’s bloodbath.
As such, I continue to believe that other factors were at play in today’s downdraft other than a pure “up/down” vote on the bailout proposal.
Lots of cross currents and backwash in this raging river.
Hope all remember the most basic rules for extreme white water rafting:
Class 4 rapids: Cover your head and protect your vital organs.
Class 5 rapids: Protect your head if you possibly can.
We are in Class III and Class IV rapids now. We are in danger of losing the raft. Let’s all of us use our best decisionmaking here.
Our children are counting on it.
Matthew Dubuque
would you mind posting a link for that claim ? I’m having trouble recalling Roubini being as supportive of the proposal as your claim suggests .
http://www.nytimes.com/2008/09/21/business/21econ.html?hp
HIs only reservation in both comments was that the plan didn’t do enough, ie, by implication, it needed to be bigger.
This is an excellent site, btw…
If hedgies can’t float commercial paper and can’t play short, most of them can’t get closer to alpha than theta. The real hemorraghic fever that for them though, may be credit rationing. Whatever proposal comes through Congress on a financial system bailout is likely to identify _which_ kinds of institutions will be inside the portcullis to be save and which will be left outside with the zombies. I seriously doubt that hediges will make it into the plan, Paulson’s manful efforts to get every favorite sun qualified nothwithstanding. At that point, credit will only go to the Saved, except at very severe terms to the hardiest and best capitalized of the Drowning. To put that another way, one consequence of the Bail and Pray Bill will be a tacit designation of who _won’t_ be saved—followed immediately by a slaughter of the latter. Well, that’s one way to reduce over-capacity. Gonna be a bitter winter outside the portcullis, methinks.
Deus ex machina.
“Hedge funds suffer mass redemptions”
Dear Mr. Smith! I really enjoy your articles, but I would like to say something about the wording of this title. Hedge funds cannot “suffer” they have no feelings. In my opinion emotional words like that don’t make the style more colorful, on the contrary, it makes an unintentionally cynical impression. How many people, whole countries really suffered because of these Hedge Fund? And no newspaper wrote the title “People suffering because of Hedge Fund attack”.
Sincerely
Roubini is not perfect, nor is anyone else.
If anything, I respect Roubini more now that I see he is willing to change his point of view as more information comes to light.
If only all our dear leaders had the gumption to see their past mistakes, admit to them, and adopt a new point of view based on new information.
Great site Yves…
River
the only other option is to short the dollar
Why don’t we just make Roubini the Treasury Secretary and get rid of the ineffective idiot Paulson?
Even the great performing Lahde capital is returning funds. THey even had a 4 digit return year.
http://www.bailoutville.com/forums/f11/phenomenal-hedge-fund-returns-money-18.html
I agree with all of the above
and would like to say that the economic blogs have been the MOST ACCURATE and inference, the most important/valuable resource available, including comment sections.
As for my opinion, I want first and foremost transparency, for without that, we the taxpayer will ultimately pay more, because we weren’t allowed to know all the facts. We the public are not dummies, as this blog and many others show. And Paulson is not qualified, nor is anyone else, to be sole decider.
Bill S.
Nothing has to take two years and you do not have to wait for the quarter to run because today is the end of someone else’s quarter.
what we have here is a total breakdown of faith in the wall street pyramid scheme and permagrowth itself.
efficient application of capital don’t make me laugh.
just burning our descendants heritage to build unsustainable mcmansions whilst the thermostat goes to boil when ready
sean
ps. been reading your site for a year and its truly outstanding. great work. don’t let them grind you down.
What kind of spin could be put out to bail out hedge funds? I can’t afford my lease on my Escalade? Can’t make the payment on my McMansion in the Hamptons? No ski trip to Vail this winter? These funds are open specifically to high net worth, high earners. No pain, no gain.