One need only look to July performance numbers to see that these are tough times for hedge funds. But one expert in hedge fund disasters says things are even worse than they seem.
Hans Hufschmid, once the London co-chief for Long-Term Capital Management, says things today are “much worse” than 10 years ago, when LTCM collapsed, losing more than $4 billion. The failure of LTCM, which required a $3.5 billion Wall Street bailout, was the largest and most spectacular hedge fund collapse until the demise of Amaranth Advisors two years ago.
“It’s definitely a trickier environment,” Hufschmid, who now heads hedge fund administrator GlobeOp Financial Services, told Bloomberg News. “The market is much worse than it was in 1998. Then it was just LTCM, but this impacts everybody.”
The culprit is the credit crisis, which has hedge funds worried about their prime brokers for the first time, Hufschmid said.
“Hedge funds live on credit and leverage and the ability to finance esoteric positions for a long time. To the extent liquidity is drying up as it is now, that becomes more difficult.”
But banks are not the only ones less free with their money when it comes to hedge funds. Investors have become more skittish, making it difficult to get new hedge funds off the ground.
According to Hufschmid, “seven or eight” GlobeOp clients that were ready to debut with between $500 million and $2 billion have not done so.
“Some of them have given up,” he said. “A year or two ago, they would have started.”