It is becoming increasingly likely that big hedge funds will end the year with steep losses, says Maureen Farrell in her CNNMoney article, “Big hedge funds are getting slaughtered.” Hedge funds, which are unregulated, now manage $2.04 trillion, the most money they have ever managed. Some are marketed as absolute return funds that are supposed, by virtue of complex hedging strategies, to be able to provide a positive return in up and down markets alike.
What they may actually provide is a warning of trouble, like a canary in a coal mine. “Because hedge funds are expected and incentivized to take on a broad variety of risks, they can get killed during bad times from market turmoil and dislocation,” Andrew Lo, the director of MIT’s Laboratory for Financial Engineering, was quoted as saying, adding: “They’re tremendously valuable as early warning indicators of oncoming distress.”
In general, hedge funds have tracked the stock market down. In fact, many big hedge funds have fallen more than the broad stock market. The article mentions to Lyxor Asset Management, a part of Societe General, a French bank. Lyxor feeds $11.7 billion of investor money into 100 hedge funds. Fifteen of those funds had double digit losses as of September 2, with five of them suffering losses of more than 20%. The five worst include: (1) Altis Partners’ Altis Fund (a commodities futures fund); (2) Altima Partners’ Global Special Situations Fund and (3) John Paulson’s Advantage Fund Limited (both event-driven and risk arbitrage funds); (4) Mount Lucas Partners’ MLM Fund (undervalued assets fund); and (5) CRM Windridge (stocks, both long and short positions).
Hedge funds are a type of alternative investment. Alternative investments are highly complex investments and involve significant fees and risk of loss. They include venture capital investments, private equity, hedge funds, exchange-traded notes, limited partnerships, and structured products.
Atlanta attorney J. Boyd Page observed: “Hedge funds are sold to investors either directly or through brokerage firms. They are often sold as a way to diversify away from broad stock market risk. However, as the article indicates, they are often highly correlated with stock market risk. The risk is aggravated when they are sold to investors in large chunks (often close to 20% of the entire portfolio). Brokers have a legal duty to explain all the important risks of any investment they recommend, but investors are usually not told the true risks involved. Investors who have lost money in hedge funds may have compelling claims to recover their losses.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving hedge funds and other alternative investments. For further information, please contact us.