By Apu Sikri
NEW YORK: Free-wheeling global hedge funds that were blamed by governments worldwide for the Asian financial crisis are now suffering the wrath of their shareholders, who are pulling back investments, citing the funds' poor performances and secretive ways.
The two largest global "macro" hedge funds--the Quantum Fund run by George Soros and the Jaguar Fund led by Julian Robertson--have seen assets under management fall by almost a third to about US$13bil from US$18bil last summer, according to research firms that track hedge funds.
Tiger's Jaguar fund saw assets decline from US$12.6bil in August of 1998 to about US$8bil currently, according to sources familiar with the fund. Tiger currently manages about US$13bil in total assets.
Hedge fund assets have shrunk partly due to losses on investments. Quantum is down 14% in the first five months and Jaguar has lost 8%, said sources who deal with the fund.
But investors are also pulling back, sometimes forcing these funds to make quick sales of investments to meet redemptions.
Occasionally, talk of selling by these large and powerful funds sparks a sell-off, as happened briefly Friday in US Treasuries. The mere rumour of Tiger facing shareholder withdrawals triggered what traders said was a decline in US government bonds.
A spokesman for Tiger denied that there were large withdrawals and added that the fund "could pay out its redemptions fourfold."
Among large investors who have cut back investments in Soros and Tiger is Haussmann Holdings NV, which manages US$3.5bil for several wealthy individuals and institutions.
Haussmann recently cut its investment in Soros' flagship Quantum Fund to 8% of assets from 12% at the end of 1998 and 20% in 1997. It also sliced its investment with Robertson's Jaguar Fund to 5% from 10%.
Haussmann, an offshore investments manager based on the island of Curacao in the southern Caribbean, pulled back as its clients demanded back some of their money, said Louis-Amedee de Moustier, chairman of the fund.
It also started to worry about the huge sums of money that hedge fund gurus like Soros and Robertson manage amid diminishing opportunities in global arbitrage.
"Governments won't have much flexibility to run inefficient currencies because of global competition. Therefore, opportunities in currency trading will diminish," said Ken Kinsey-Quick, a member of Haussmann's research committee.
A global financial crisis that began in July 1997 with the devaluation of Thailand's baht forced governments around the world to adopt floating exchange rate systems.
Floating exchange rates often reflect the true economic value of the currency, leaving little room for speculation, analysts said.
With fewer opportunities, macro hedge funds have struggled to beat major equity markets.
About 62 global macro hedge funds with US$35.4bil in assets turned in a meagre 2.5% return in the first four months of this year, according to MAR Hedge, a publishing firm that tracks hedge fund performance. In contrast, the S&P 500 index gave investors about 9% in the same period.
Performance last year was not better. Macro hedge funds as a group were up 3.7% in 1998, with the S&P 500 climbing a whopping 26.7%.
Hedge funds are loosely regulated investment vehicles for wealthy individuals and institutions. The US Securities and Exchange Commission broadly requires these funds to have less than 100 investors in return for almost no regulatory oversight.
The poor returns have upset investors and prompted them to question the wide investment mandate of these funds.
"Macro hedge funds can do anything they want anywhere in the world, it's a virtual license to kill," said Michael Gutnick, senior vice president of finance at Memorial Sloan-Kettering Cancer Centre, which has about 5% of US$2bil in assets invested with hedge funds.
"If investors lose money in a down market, they can understand why. When global macros lose, the reasons are less clear," said Hunt Taylor, senior vice president for worldwide sales and marketing at Tremont Advisors Inc, which advises clients on hedge fund investments.
The lack of transparency, even to their own shareholders, became an issue of concern after Long-Term Capital Management had to be rescued with a financing package from large commercial and investment banks last September.
The fund's early US$100bil in investments in a wide array of stocks, bonds and derivatives was unknown even to investors or bank lenders.
To some extent, macro hedge funds need some privacy. Because of large investments they hold in any single market, other markets' participants can easily move against these funds, forcing their hand if the market moves against them, Taylor at Tremont said.
But investors say they need more information so they can decide which market or asset they are putting their money in. Many of them are now diverting assets to hedge funds that spell out their investment strategy and define the markets that they will trade in.--Reuters