Penguin House - Hedge Funds

Last night we are at Lars' book launching party on the Strand, pictured. Recall Lars a retired hedge fund manager who wrote an insider's expose on the industry. Until it all ended, money was easy assuming, of course, one could raise it. Hedge fund economics simple: 20% of the upside over a "high water mark" plus a management fee on assets of 1-2% per annum (hedge funds are different from long-only funds as they can "short" stocks or bet on their decline; this allows them to "hedge" their position). Consider a small fund of say $200 million. Should the thing double, the fees to the manager are $40 million paid immediately (private equity, by contrast, must pay back its investors+a preferred dividend of 7-8% before they can take their "carried interest," also 20%. This period rarely less than five-years and more likely seven or more; one advantage private equity enjoys is a "lock" on capital of ten years while hedge funds must return money immediately if "called"). But sweet liquidity: managers that caught the timing made themselves rich, and stayed rich, even when the financial markets crashed and their investors crushed.

Since '07 things have been tough for hedge funds but the money, inevitably, comes back: investors withdrew $131 billion from the industry in 2009 but strong returns last year boosted overall industry assets to $1.6 trillion, according to MarketWatch. That's almost $260 billion more than the industry trough in the first quarter of 2009 but still $330 billion below the peak of $1.93 trillion set in the second quarter of 2008. Putting this into perspective, we have likely spent as much on Iraq.

Lars is charming in his speech - he keeps his audience by choosing not to read a chapter. He knows the crowd with him this perfect London evening to schmooze and drink and look at the pretty view from the tenth floor of Penguin House. We sure enjoy ourselves.