Does anyone have faith in the hedge fund industry anymore?  Let’s face it, the debacles, blow ups, negligence, arrogance and outright idiocy have been hard to watch - and read about. From a public relations stand point, the industry has completely shattered its credibility. 

What amazes us is the complete lack of outrage by the public (and investors) and by the lack of any ideas by insiders as to how to prevent it from happening again.  To our knowledge, no hedge fund trade association has offered any presciptives.

If there was ever a time for the hedge fund trade associations to take a stand, it is now.  Since we don’t get anything from politicians except the same old thing: more regulation. Some one has to step in.

Over the last six months, the hedge fund industry has been racked by more scandals than I care to count. But the implosion of Bear Stearns, the write downs by Merrill Lynch, and the Bayou Capital debacle (and more) in total are far worse than the “crisis” caused by John Meriwether and Long-Term Capital Management back in 1998.  Remember that one?  Remember all the talk of how the entire financial system was in jeopardy because of the over use of leverage by LTCM?  Well, if the financial system can deal with the body blows its suffered at the hands of Jimmy Cayne and his cadre of (supposedly) brilliant toadies at Bear, along with the other idiots that have steered their hedge funds onto the rocks as a result of the subprime mess, it can handle just about anything.

[Okay, the Bayou debacle isn’t that new, nor is it related to the subprime mess.  However, the faked suicide and sensational flight of Sam Israel raises the spector of fraud within the hedge fund world again.]

Like we said before, the hedge fund industry as it has morphed over the past 5 years is a rotting, stinking corpse now.  And good riddance.  We have long believed that hedge funds operating within large Wall Street firms are not really hedge funds at all.  They are simply another packaged product to be sold by the internal sales mechanism of these organizations.  Naturally, the argument for housing these faux hedge funds in-house was to maximize operational efficiencies (read: risk management and compliance departments), leverage the internal sales organization and to make boat loads of cash for the firm’s principals.  Sounds good on paper but the only piece missing was the risk management and compliance parts.  Oops, just a small oversight.  Sorry. 

We wonder if the faux hedge fund managers inside Bear (Ralph Cioffi and Matthew Tanninand) and other banks told the little clerks in risk management and compliance to shut up and deal with it?  We can hear them now: “Don’t bother me,” they said.  “I’m a producer!”  We can imagine them now, swaggering into work each day sporting their hand tailored suits, fancy watches and platinum cufflinks.  Masters of the Universe.   Now they are looking to be master of a cell block at best.

But the real crime here goes much deeper than mere money lost, white shoe firms collapsing, jobs lost, etc.  It is the destruction of confidence the investing public had in not only the hedge fund business, but Wall Street itself.  How does one measure that impact, we wonder?

It is time for the industry to rethink itself.

Next installment: our suggestions for the industry.

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2 Comments so far

  1. Tom L on October 17, 2008 3:07 pm

    Care to revise or amend your comments in this post regarding how well our financial system is dealing with the debacle caused by Cayne his “toadies” and the hedge funds that have steered themselves onto the rocks?

  2. tom on October 20, 2008 4:08 pm

    What is there to amend? Many of the internal hedge funds run by Bear, Lehman, etc did run themselves onto the rocks — along with the firms they operated within.

    Our financial system is handling this well? Really? An $850 billion bail out is handling this well?




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