Last November, fund-of-hedge-funds manager Sandra Manzke of Maxam Capital Management sent out a Jerry Maguire-esque letter to her investors in which she stated that she was "appalled and disgusted" by the behavior of hedge fund managers today. They no longer acted with investors' interests in mind, she said, as they did 25 years ago when she founded Tremont Capital. Managers today followed questionable practices like "gating, side pocketing, suspension of redemptions ... attempting to get their money out ahead of investors, and eliminate ing high water marks". At first, Manzke was portrayed as a whistle-blower trying to get the rest of her greedy industry in line. Then, Bernie Madoff happened. In the fallout, it came to light that both Tremont and Maxam were heavy Madoff investors. Earlier this month, both firms separately announced they would have to shut down as a result of Madoff-related losses. Ironically, the firms (like many Madoff investors) did little to no meaningful due diligence and were content to play middlemen for a performing product and collect their fees. The would-be reformer should have started her efforts in her own backyard. Hedge funds are much maligned in the press and by politicians these days. They do have some failings which need correcting, which I plainly see as a hedge fund manager myself. However, the industry will continue to attract talent, innovative strategy, and capital as a result in the coming years. Here are some of the problems with hedge funds but reasons why the industry is still an attractive place for your money.
Gating While Charging Fees is Unacceptable
A number of funds -- large and small, including ones with formerly sterling reputations such as Citadel, Farallon, and DE Shaw -- have exercised their rights to enforce a gate in the last few months, reducing how quickly investors can redeem out of the fund. The intent of a gate is to prevent a panicked run on the fund, requiring forced selling, which can be very difficult for funds holding illiquid assets, and which further lowers the value of the remaining investors' assets in the fund.