New Game Awaits Humbled Hedgies

Citadel Investment Group acquired a majority stake in E*Trade Financial, only to see its value fall precipitously. Similarly, Cerberus, the majority owner of Chrysler and GMAC, the financing arm of GM (GM), watched the automakers teeter on the brink of destruction over the past few weeks.

Any hedge fund that performed well was "either an anomaly or unreplicable. Everyone else has been hit right across the board," says Rachel Minard, president at Cogo Wolf Asset Management, a fund of funds. "What one has to be able to do in this market is move in and out of their positions and sectors with finesse and quickness. And that requires the liquidity that today is very hard to come by."

While Cogo Wolf has underperformed this year, it has placed a premium on walking clients through investment decisions to maintain and strengthen relationships: "Camaraderie, transparency, access," says Minard. The firm has managed to keep all of its clients while Minard scouts the globe for fresh capital from foreign investors.

Those that have been able to dodge the entire barrage, whether by strategy or luck, are few and far between, though some do exist.

John Jacquemin, founder of the Mooring Intrepid Opportunity Fund, laid out an investment plan in late 2005, believing there would be a "substantial correction" in housing, real estate and junk bonds.

Many of its positions moved against Mooring Intrepid for the first eight months or so, but they eventually recovered, with the fund gaining 86% this year and 216% since its inception in March 2007. But the risks were substantial, and had the housing correction taken longer to get under way, Mooring Intrepid might have become unmoored.

"[Investors] have been quite pleased because we've done so well," says Jacquemin. They were also "made very aware that it was a high-risk, high-volatility kind of fund, that if we were right it stood to make substantial gains, but that we could be wrong, or we could be right way too early, and lose most of our equity on carry costs."

Ultimately, there will surely be hedge funds left when the dust settles from the economic crisis of 2008, but, as with all industries, only the strong will survive. Those who do likely will operate on a smaller playing field with new rules and stricter refs.

"Literally, in the last year, all the definitions have changed," says Minard. "Portable alpha doesn't mean anything anymore. 130/30 is dead."

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