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.
Whether technically a hedge fund or not, the Madoff affair seems to sum up everything Main Street feels the hedge fund industry has become: secretive, unrepentant and borderline criminal.
It would be foolish to suggest that the problems facing hedge funds today are exclusively communications related. Many funds simply made bad bets, ran poor businesses or became the unfortunate victims of a severe global downturn. A few funds even continue to deliver double-digit performance and are unsurprisingly attracting new investors in spite of a recession environment.
Where communications will play a lifesaving role, however, is with the wide swath of barely performing or mildly underperforming hedge funds that exist in the middle ground and that, in turn, need to convince investors and counterparties that they are stable and viable investment businesses despite short-term setbacks.
The challenge for many of these funds is that, when they need it the most, skilled communications pros seem to be in short supply. To date, the success of the hedge fund industry has grown largely on the back of its supposed ability to deliver "uncorrelated alpha"--in other words, to return gains in any environment.
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