COMMENT&OPINION
Sinking Feeling What the Galleon
PAUL MUNGO on the resurgence of a press favourite – the hedge fund bogeyman November 29, 2009
I
n January this year, Barclays Capital released its forecast for the future of the hedge fund sector. This was an apocalyptic time for the industry, with a flood of redemptions following a torrent of losses – 19% on average in the first 11 months of 2008 – and most forecasts at the time vied to be gloomier than their predecessors. The BarCap report was notable only in that it made pessimism into a forecasting tool. According to the report, the hedge fund industry would contract by between 70% and 80% during 2009 as credit lines were withdrawn. Assets under management, in this scenario, would fall from roughly $1.5trn at the time, to as little as $300bn. The number of hedge funds would similarly shrink, leaving perhaps 1,600 still standing, many of them distressed funds. The first point to be made is that none of this has happened – at least not yet, and the likelihood of it occurring between now and the end of December is very small indeed. The second point is the BarCap report, though more cataclysmic than most, wasn’t the only one predicting the near collapse of the hedge fund industry. The third, most important point is that at the time the press ate this stuff up. And the reason they did was because it was the story they were looking for. This is not to suggest the media were being dishonest or anything other than objective. But think back 10 or 11 months. This was when The World As We Know It was coming to an end. The financial system was in what looked like a death spiral, the world economy was in meltdown, the markets were collapsing. The prevailing view was that an economic Armageddon was looming. Journalists are no less susceptible to the consensus view than anyone else. So stories that sustained conventional wisdom – that we were all going to hell in a handcart – got a lot of play. The contrarian view, that, actually, most of the hedge funds we represented were performing rather well and there was little evidence of a Gadarene rush to the exits by investors, did not receive a lot of attention. It wasn’t the story journalists were looking for. This unfortunate tendency to decide what the story is first and then search for the facts to stand it up is not always disadvantageous to the hedge fund industry. The new media consensus, the one that
appears to be prevalent at the moment, is that hedge funds have rise, Lazarus-like, from the dead and are in robust good health again. Headlines such as ‘hedge funds are back and as vibrant as ever’ or ‘hedge fund assets seen rebounding’ suggest a sunny mood all around. A recent survey reported that hedge fund assets had grown to just under $2trn, a fantastically optimistic figure given that a few months ago the total
“Along with the harder news about an industry rebounding has come the unwelcome return of the ‘hedge funds as lifestyle’ pieces, which focus almost monomaniacally on managers’ salaries” AuM of the sector was estimated at just $1.4trn, but optimism is now the attitude of choice, so few queried the number. Now is not time to be complacent, though. Along with the harder news stories about an industry rebounding has come the unwelcome return of what might be called the ‘hedge funds as lifestyle’ piece. A recent edition of a glossy magazine ran a longish article about ‘Mayfair’s Hedge Row’ flourishing once more, which focused almost monomaniacally on managers’ inflated salaries and what they chose to spend them on (Maseratis, $10m loft apartments and lap dancers apparently). As much as the notion of the down-at-heel manager whose fund has been hit by astronomical redemptions was unpalatable, the return of the stereotype of the manager as a Krug-swilling, Ferrari-driving, Saville Row-suited plutocrat is perhaps not quite the image the industry is striving for. But that’s where we’re headed. After the fall comes the revival, and then comes the excess. The industry is once again captive to a narrative not of its own making, but one spun out of whole cloth by the media. It’s time to take charge of that narrative. Paul Mungo is a former editor of HFMWeek. He now works as a hedge fund public relations expert for Peregrine Communications.