Hedgehogs Ravaged by Bears

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Many big institutions have been using the gains in their endowment portfolios for the funding of current operations. They are now faced with either sharply cutting operating budgets or selling investment assets. Charitable organizations and educational institutions are hurting big time. Harvard (one that has funded a major part of its operating budget from its endowment) has been dumping its private-equity stakes at 50 to 80 percent discounts, and recently raised money by issuing bonds. Pension funds, too, need cash. There is a desperate scramble for liquidity, which may force institutional investors to redeem from their large hedge-fund stakes.

As for individuals, they are just plain terrified from the wealth destruction they have suffered in the past year.

Does all this spell another horrendous year for the stock markets as a tsunami of forced selling overwhelms the great valuations that exist in many blue-chip stocks? Not necessarily, although it is a risk to bear in mind. I'm bullish because I'm a value investor. Stocks are dirt cheap, and I think that at some point this year we're going to have a massive rally. But whatever happens to stock markets, the hedge-fund industry in the future will be much smaller, far less leveraged and have considerably lower fees. Hedge-fund and private-equity managers have been among the most overcompensated executives in the history of the world. The golden years are over and gone, and I must admit the world will not be diminished by their passing.

Biggs is a managing partner of Traxis Partners hedge fund in New York.

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Posted By: PacificGatePost @ 01/25/2009 5:45:27 PM

THERE IS MUCH TO BE LEARNED FROM BERNIE MADOFF, don???t give up on him.

What if a letter written by Bernie Madoff explaining himself was discovered?
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http://pacificgatepost.blogspot.com/2009/01/bernie-madoff-letter-of-explanation.html
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???.in his own words? Now get the subpoena requests out.
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Posted By: Holly Garfield @ 01/25/2009 1:02:35 AM

Hedge funds had ... 'Leverage' to reuse a cable TV show promo. Now that ... 'Leverage' is leveraged in the wrong direction for the near future. Oops. Hedge funds didn't hedge. They didn't seem to know any more about the state of the financial industry than anyone else did, and they were about the biggest sector of the equity market. The de facto deregulation put the whole system in the position where no one could see the level of potential damage, since much of the bad debt was completely off the radar to anyone outside of the holding company. This is where both deregulation and the original AIG Financial Services models break down completely. Deregulation meant that $3 trillion in assets went unseen by the public and government. It also meant that the FS model used by AIG, then everyone else, had to fail. You can't model something that you can't see. Eash investment company could see and model their own assets, but couldn't see everyone else's bad assets to put into the model's engine. The computer models' engines ended up like running a Ferrari engine on Venezuela crude. Everyone's models ended up with the old GIGO (garbage in, garbage out) computer problem.
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Posted By: 1werd @ 01/24/2009 4:59:41 PM

The future will require absolute risk management. The speculator (aka - buy & hold & pray) as well as the diversified investor will seek to reduce risk. A Defined Risk Strategy will likely draw more investors. Randy Swan wrote, "..stock with a reasonable amount of protection and income generating opportunities are you only real bet..." It is unlikely the future will deliver the same type of bull markets that led investors to hedge funds.