TEXT OF STORY
KAI RYSSDAL: Bear Stearns is probably the best known casualty of the credit crisis. But in the past couple of weeks…half a dozen hedge funds have gone down the same path…without benefit of a bailout from the Federal Reserve or JP Morgan. Multi-billion dollar funds like Peloton and Carlysle Capital have disappeared in not much more than a puff of smoke. And analysts say dozens more could be looking at the same fate. From London Stephen Beard reports.
STEPHEN BEARD: June 2006. Four thousand hedge fund managers gathered in the grounds of an English stately home for one of the world’s most bizarre business events:
[SOUND: The Who performing “I Can’t Explain.”]
The Who topped the bill. The event was called “Hedgestock.” Two days of love, peace and networking. These “masters of the universe” ditched their suits and, wearing kaftans and hippy beads, they quaffed champagne, played polo and partied. Analyst Simon Nixon says this was the peak of their “pride and extravagance.”
Simon NIXON: People were making dynastic fortunes in the space of a few years. Something unprecedented actually in anytime in history. So I think, yes, of course, there was a lot of hubris.
[SOUND: Hedge fund dealing room.]
Not anymore. The muted atmosphere in this hedge fund dealing room in London tells its own story. The mood has definitely darkened says hedge-fund manager Stephen Bell. No longer brimming with confidence, some masters of the universe are afraid:
STEPHEN BELL: It’s people in relatively important positions — in important banks, big banks — frightened what might happen. Literally frightened. I speak to them on the phone and there’s a quiver in their voice.
Bell’s fund is actually doing well. He avoided mortgage-backed securities like the plague. And he didn’t leverage up or borrow heavily. So he’s making money for his clients. If he wasn’t, he wouldn’t be talking to us.
[SOUND: Ring. “Hello Peloton Partners!” ….]
None of the hedge-fund managers whose funds have blown up in recent weeks were available for comment:
RECEPTIONIST: Oh, OK, can I take your details … he’s not around at the moment.
Once they bragged about their infinite expertise, grandly demanding 20 percent performance fees. Now they’re lying low. The banks are relucnat to lend them money. Wealthy investors are nervous about their complex trading startegies.
Even successful hedgies like Stephen Bell admit the bounce has gone out of this business. After eight months of credit crunch, the mood is wary:
BELL: People have adjusted to it. A little bit more accustomed. But, you know, we’re still afraid of what might smack us on the side of the head unexpectedly next.
[SOUND: Street atmosphere.]
No one is forecasting the end of hedge funds. Fast moving and flexible, they can make a lot of money, and many still do. Overall, since the credit crunch began, they have done better than mutual funds. But the blow-ups have dented the image of this industry. The name “hedge” has become a liability. And economist Andrew Hilton thinks the huge performance fees are unlikely to survive:
ANDREW HILTON: The fee structure probably won’t continue to exist very much longer.
BEARD: And the name too might disappear, you think?
HILTON: The name might well. Try to think of a better name: Multi-directional leveraged fund. MDLF.
BEARD: I prefer hedge fund!
SOUND: Uh, uh, I’m sorry, what?
This recently recorded song could turn out to be a financial indicator. It’s penned by two hedge-fund managers who call themselves “The Power Lords.”
SONG: “Dance in your bling because we’re Lords of the String!”
The song is a celebration of the G-String. This could be the sign the swagger is returning to a battered industry. Or it could be just a couple of hedgies looking for a new, more lucrative line of work.
In London, this is Stephen Beard for Marketplace.
Marketplace is on a mission.
We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.
Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?