Tip Sheet: Hedge Fund Headaches: Best Practices for Communicating Through Economic Turmoil

By Dan Simon According to the most recent research by Eurekahedge, the hedge fund industry shrank by as much as a fifth (or $350 billion) in 2008, with 90% of that decrease coming in the three months leading up to November. Much of the reduction was performance related--a 12% average loss across the industry--but the loss of many additional billions was a result of redemptions: nervous investors withdrawing fistfuls of cash from funds as soon as they were contractually able. Q4 rounded out an appalling year for hedge funds, which witnessed, among other problems, a number of the industry's high-profile prime brokers--namely, investment banks like Lehman Brothers that offer execution services to hedge funds--disappear overnight. With Shakespearean timing, the Madoff scandal that emerged in mid-December, in which the former chairman of NASDAQ was arrested for orchestrating the largest pyramid scheme in history, kicked an industry that was already on the floor. Though not actually a hedge fund, the structure of Bernard Madoff's $17 billion investment management business was similar to many alternative investment vehicles, and niceties mean very little to shell-shocked investors.

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