This blog post originally appeared on RealMoney Silver on Aug. 27 at 8:12 a.m. EDT.
Let me have men about me that are fat,
Sleek-headed men and such as sleep a-nights.
Yond Cassius has a lean and hungry look,
He thinks too much; such men are dangerous.-- William Shakespeare, Julius Caesar
Not many are discussing the impact of the turmoil in the hedge fund and fund of fund industries these days.
I believe it to be of consequence, as the weak markets and the overall poor performance of hedge funds in many different asset classes have begun to feed on each other, resulting in:
- 1. some risk managers taking over from portfolio managers, causing "forced" sales;
2. an expansion of redemptions, also causing forced sales; and
3. reduced aggregate hedge fund industry inflows.
Some are of the view that today's commotion has been restricted to small to medium-sized hedge funds and that, in the main, the larger ones were operating just fine. Though the biggest hedge fund stalwarts are largely immune, I am less certain whether many just below hedge fund "royalty" will come out of 2008's market conditions unscathed. Should markets remain moribund into 2009, pressures will intensify further in all hedge funds regardless of size.
From my perch, last week's
of Dan Benton's Andor Capital Management is symptomatic that problems (redemptions/performance issues) are moving up the ladder of size. And, as I previously wrote, a continuation of weak markets (and poor performance) might foreshadow more closures of midsized (and even some larger) hedge funds over the balance of the year.
Performance disappointments and increased redemptions are not strictly limited to hedge fund; the fund of fund community, which charges another layer of fees and provides much of the capital for hedge funds, is also reeling as, in a period of poor or substandard returns, clients begin to question the additional layer of charges by those fund of funds. They, too, are feeling the pain of poor performance and redemptions. A good example mentioned recently in the
New York Times
of Insana Capital Partners.
If I am correct that the disruptive influence on flows from the fund of fund industry coupled with forced selling decisions by not only the trigger-happy (and smallish) hedge fund cabal but increasingly from some of the medium- to larger-sized hedge funds as well, then their recent effect on volatility and lower share prices shouldn't be dismissed. Nor should the lengthy effect of these disruptions be underestimated by investors.
Doug Kass writes daily for
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Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.