Hedge funds were lumped in with banks and derivatives salesman in getting the blame for nearly wrecking the world’s financial system in the recent downturn. But was the blame justified?
Not really, says the Washington Post. While some funds suffered serious performance declines and investor redemptions, the bulk seem to have been more cautious on risk management than the big banks. Having “skin in the game” and their net worth tied to their long-term performance apparently did serve to reign in losses. Author David Ignatius says they were in fact “regulated” by their investors’ expectations. They also knew there would be no government check waiting to bait them out if they screwed up.
Ignatius draws upon data from HedgeFund Intelligence to show that U.S.-based hedge funds suffered an average loss of 12.7 percent in 2008. Painful, for sure, but nowhere near the 38.5 percent decline by the S&P 500. Overall, nearly 500 hedge funds went out of business last year, out of a possible universe of 7,000.
His theory is that the collapse of Long-Term Capital Management in 1998 put enough fear in most hedge fund managers to tighten their risk standards. Many were less leveraged that the big, supposedly regulated banks.
As we’ve noted in these postings, risk management continues to be a hot area of hiring for hedge fund jobs and will continue to be so.