The timing could not be more acute. Just as the Financial Services Authority is about to float the idea of retail investors having more access to hedge funds, along comes a salutary warning of the risks involved.
The regulator could issue discussion papers as soon as Tuesday, but it will do so just as some such lightly regulated vehicles are shutting up shop and others are performing poorly.
Bailey Coates, once a prize-winning London-based hedge fund, told investors over the weekend that it was closing its flagship Cromwell fund.
Bailey Coates is a long-short equity shop founded by two former analysts at Perry Capital, a US hedge fund. After initial successes in the US that prompted investors to place $1.3bn (£710m) at its peak, it over-reached itself to the point where it has lost about 20 per cent this year.
A letter to investors late last week told investors to redeem their holdings by the end of this month.
In the US, Marin Capital, a convertible bond fund that at one time ran $1.7bn, said it would stop trading because returns were being pushed down by too many investors with the same strategy.
Convertible bond arbitrage and credit funds have been particularly badly hit in recent months because of overcrowding and unexpected turmoil when the debt of Ford and General Motors was downgraded last month.
Marin, observers note, was by no means the worst performer in the convertible arbitrage universe, but nonetheless decided to return money to investors.
In Singapore, Aman Capital, a macro fund, is ceasing trading after losing at least 20 per cent this year. Casualties are thought to include GAM, the specialist fund manager owned by UBS, the Swiss bank. It is thought to have put up $150m of seed capital.
Macro is the strategy pursued by well-known investors such as George Soros and Julian Robertson, in which a view is formed of how markets will perform over the medium term.
None of these funds was small scale. They were reputable and relatively high-profile.
“The hedge fund world is a tough world where people expect decent returns. If those returns are not delivered those managers will pay the price,” says Philip Richards of RAB Capital in London. RAB announced on Monday that it was buying Cross Asset Management, an event-driven hedge fund.
The damage has not been limited to funds that have closed. Others are simply performing poorly.
GLG last week won a prize as the most respected hedge fund in London. Yet GLG’s market neutral fund, one of its two convertible bond arbitrage vehicles, fell 9 per cent in May and has slumped 15 per cent in the year to date.
The second GLG convertibles vehicle, the credit fund, fell 14.5 per cent in May and is down 15.5 per cent in the year to date.
