As the eye-popping profits of hedge funds dry up amid the financial crisis, the industry looks set to shrink substantially in its European headquarters of London over the next year.
Discretion is everything in London’s exclusive Mayfair district which is quietly home to a third of the world’s hedge funds, the highly speculative investment vehicles often blamed when markets plunge.
A small brass plaque on a door tucked in between Chanel and Versace boutiques is often the only sign of their existence.
But those highly polished doors cannot hold back the same chaos that has swept through the rest of the finance world.
John Godden, chief executive officer at hedge fund consultancy IGS Group, is one of the rare figures in a secretive world to speak openly about the scale of the problems.
He was in the process of drawing up next year’s aims for his group when US investment bank Lehman Brothers collapsed in September, and panic buttons were pressed all over the financial world.
“Our business model was to manage growth. Now, it’s about managing decline,” said Godden, whose company manages about 100 hedge funds.
“Everything was still going in July and August. We were expecting a turn in the stock markets — but not some banks to disappear,” he said.
Not only did Lehman’s lend to many hedge funds, its disappearance was a psychological blow to the industry.
“On the Friday, we had a call from [ratings agency] Standard and Poor’s saying they still believed Lehmans was a triple A,” he said, using the term for the highest rating. “The next Monday, it went bust. We found that the impossible was possible.”
“Everything stopped. Nobody invested,” Godden said.
By the end of October, hedge funds were at their lowest level since late 2006, the US-based body Hedge Fund Research said.
Hedge funds have often become the scapegoats when markets rapidly lose value because of their policy of ruthlessly aiming to maximize their profits rather than — like many funds — simply on outperforming an index.
Gains of nearly 20 percent were common in 2003 and many funds were making 10 percent a year over the next four years as equity markets rose.
But as banks refuse to lend and profits on equity markets evaporate, the hedge funds are feeling the pinch.
And the alleged US$50 billion fraud of US financier Bernard Madoff looks likely to make the super-rich think twice before plunging their money into high-risk investments.