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Fallout: The Financial Crisis

Hedge fund letters inform, entertain

Amy Scott Jan 16, 2009
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Fallout: The Financial Crisis

Hedge fund letters inform, entertain

Amy Scott Jan 16, 2009
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Kai Ryssdal: For most of us 2008 is done and gone. Good riddance too. For the money people though, the tough times aren’t over yet. A lot of hedge funds are still trying to figure out exactly how much they made or lost last year. Alright, lost.

New figures out this week show that worldwide hedge funds gave back a record $350 billion over the past 12 months. Bad as that was though, now comes the harder part — breaking the news to investors, which those funds will be doing over the next couple of weeks in an annual ritual known as the year-end investor letter.

Marketplace’s Amy Scott reports from New York.


Amy Scott: The best hedge fund letters entertain as well as inform. Like the one from Whitebox Advisers that popped up on the Web from the third quarter.

Whitebox Advisers: Above all, we will survive because, unlike the fallen, our portfolios do not consist of great piles of manure, bought as if it were gold.

Here’s a reading from another gem, penned by Greenlight Capital’s David Einhorn.

Greenlight Capital: In hindsight, our suggestion from last quarter’s letter to go to cash and go to the beach would have been the better option.

Paige Capital is putting the finishing touches on its year-end letter. When I visited recently, co-founder Michele Paige had drawn a diagram on her conference room whiteboard. She plotted various investor letters on a spectrum ranging from useless to relevant.

Michele Paige: Well, we’d like to think we’re right up here. Right? Right over here in the “lots of information and highly relevant.”

Christopher Paige, Michele’s husband and the firm’s general counsel, is charged with the wordsmithing. His letters are peppered with snarky asides and cultural references. This year’s effort mentions Robinson Crusoe and Nazi Germany. It takes aim at Alan Greenspan for laying the foundations of the crisis and pours scorn on Congress’ attempts to dig us out.

Christopher Paige: We try to be more colorful and memorable, because one of the things we realize is we’re a smaller fund. So part of the way you can stand out is that you said it particularly well and it was a very interesting thing to say.

Hedge funds are off-limits to small investors, so they’re not allowed to advertise. Michele Paige says these letters are the next best thing.

Michele Paige: This is the way we get to our investors. It gives them a way to understand what we’ve been thinking about, how we’ve been thinking about it, and where we think we’re going.

It’s a lot easier to write a letter like this when you’re in Paige’s position. Her funds were up for the year, even if only by 3 to 5 percent. The average hedge fund lost about 19 percent. Howard Marks is chairman of Oaktree Capital Management in Los Angeles. He says in this round of year-end letters managers have some explaining to do.

Howard Marks: There will be some mea culpa. There will be some falling on the sword. Most people, it’s only human nature to try to put the best foot forward and shine the best light on things. I guess that’s called spin. But in a year as bad as this one was, it’s very hard to turn a big decline into a great accomplishment.

Marks says his funds were down for the year. He wouldn’t say how much. But he says, given the environment, his investors shouldn’t be surprised when they get his letter next month.

Marks: The key in investment management starts, well, way before the letter is written. If you created reasonable expectations, then nothing you have to say about your performance in ’08 should come as a shock. The only thing that’s shocking is how bad the environment was.

Now and then Marks indulges in a lengthy memo to investors, complete with macro-economic analysis and philosophical musings. He keeps his quarterly reports short and sweet. That’s the kind of letter David Friedland prefers. He’s with Magnum Funds, a firm that invests in other hedge funds. He says he gets more than 100 hedge fund letters this time of year.

David Friedland: Obviously it’s nice to read well-explained letters, but the last thing we want to do is read six, seven, eight-page letters from each of our hedge fund managers. It’s going to be very difficult to take the time to do that.

After he wades through all those letters, Friedland will eventually sit down to write his own year-end missive to investors. He’ll have to explain that his funds are down 11 to 14 percent. But he will have one bit of good news to highlight: Unlike many funds of funds, his had nothing to do with Bernie Madoff.

In New York, I’m Amy Scott for Marketplace.

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