Poor Returns Lead To Hedge Fund Shake-Out

by Carla Johnson, Investors Offshore.com

21 June 2005

With performance levels in the hedge fund sector some of the poorest in three years, some hedge funds are being squeezed out of the market.

According to Bloomberg News, after suffering losses of around 20%, the Bailey Coates Cromwell Fund, which at its peak last year had $1.3 billion in assets under management, last Friday issued a letter to investors inviting them to withdraw money before the fund is put into formal liquidation.

The Cromwell fund, founded two years ago by former Perry Capital analysts Jonathan Bailey and Stephen Coates, is thought to have suffered losses on various bets on US stocks.

Meanwhile, another leading London-based hedge fund, GLG Partners, has recently been caught out by poor performance in its two main funds, including its $1 billion Credit Fund, which has reportedly fallen by 14.5% in value, and its $2.5 billion Market Neutral Fund, which depreciated by 9% in May.

Consequently, the hedge fund is preparing to repay investors around $1 billion.

Marin Capital LP, a $1.4 billion convertible-bond fund in San Raphael, California, has also announced that it plans to close, citing a "lack of suitable investment opportunities".

Hedge funds gained an average of 0.22% in the first five months of the year - the worst performance since 2002 - although this masks some sharp losses in certain hedge fund strategies, particularly convertible arbitrage.

Convertible funds became all the rage after delivering returns of 28% in 1998. By the first quarter of 2005, total assets in the strategy had escalated to some $43 billion, according to Hedge Fund Research. However, as the strategy has become increasingly popular, managers are no longer seeing profit-making inefficiencies in a market that has become increasingly more efficient. Returns dropped to 10% in 2003, to 1% last year and have dived into negative territory in 2005.

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