It’s not a good time to be a hedge fund manager. July saw a rise in equities, particularly financials, and a drop in commodities, which crushed funds that had been betting on the reverse happening. In other words, the market surprised them. As John Maynard Keynes wrote, “markets can stay irrational longer than you can stay liquid.” Now many hedge funds may be in danger of learning this lesson the hard way.
Bloomberg has an ominous article today, which warns that the contracting credit environment among prime brokers is worse than the one that felled LTCM in 1998 and could pose an existential challenge to many hedge funds. Bloomberg’s Tom Cahill writes “Banks’ increasing reluctance to lend has hurt hedge-fund operations.” Cahill interviewed former LTCM partner Hans Hufschmid, who explained that “[h]edge funds live on credit and leverage and the ability to finance esoteric positions for a long time. … To the extent liquidity is drying up as it is now, that becomes more difficult.”
True, hard time to be a hedge fund manager. Hopefully those with sound repeatable investment processes will prevail though and those that just wanted to make a lot of money with no genuine value-added insights or processes will close up shop.
- Richard