Hedge Funds, Short Selling and a Meltdown!

Hedge Fund Update
January was the second consecutive positive month for overall hedge fund performance.   Does two months make a trend?  Maybe not, but we can hope.  What is clear is that money continued to leave hedge funds in January, marking the fifth consecutive month where Assets Under Management (AUM) for hedge funds declined.  Eurekahedge estimates that hedge fund AUM declined but $384 by the end of 2008.  They further advise us that 505 hedge funds closed last year as opposed to only 280 new launches.  The number of closures has been amazingly consistent over recent years, but what is different is that in previous years new launches outpaced closures.  

There have been a few stories over the past couple of days that have addressed the tightening conditions for hedge funds from their prime brokers.  The talk is about “platinum lists”, “high-touch or low-touch clients”, “tail lists” … etc.  These are descriptions that are being applied to the categorisation of hedge fund clients by various prime brokerage firms.  We now live in a market where there are limited balance sheet and funding resources.  Overlooked by the articles, but no less scarce, is a resource called “staff” that is needed to service the accounts.  Virtually every firm, including those that have expanded their PB businesses over the past year, have been under pressure to reduce headcount. 

Less resources at PB = more focus on profitable or potentially profitable clients and those that are most likely to survive.  It may not be fair, but it is a fact.

http://online.wsj.com/article/SB123483417670296081.html

http://www.efinancialnews.com/archive/keyword/Eurekahedge/1/content/1053119004

Unintended Consequences
I have referred to unintended consequences on a number of occasions and I think the current furore over Legal & General shares is a perfect example.  The shares have been taking a battering in the past couple of days after the disclosure of short positions by Odey Asset Management and Lansdowne Partners.  Neither had a short position in excess of 1% of the company at the time of their most recent disclosure, however their disclosure has been identified by the media as the trigger for the shares tumbling.  Funny though, the LGEN shares peaked almost exactly two years ago and have been falling ever since.  Click on the chart for a larger version, courtesy of Bloomberg.  Is the short position disclosure really the driver of the share price fall?  You decide.

INSIDE THE MELTDOWN
I watched the PBS Frontline program:  "Inside The Meltdown" which is hour-long documentary covering the crisis from Bear Stearns last March up until the end of the Bush administration. If you enjoying the drama of the crisis (and can forget about all your friends, family and colleagues that have been hurt as a result), it is quite compelling.  56 minutes long.