Interesting Evening With Hedge Fund Managers

I attended a dinner last night where about 50 extremely smart hedge fund and portfolio managers met for what one described as group therapy. We listened to several incredibly articulate and informed speakers talk about a few key items that were the main take-aways for the evening:

1. The hedge fund model, said one, is broken. Example: the manager wanted to invest in an illiquid stock with a bid/ask of 20/30. He wanted to buy a big chunk and was told the only way to do that was to pay the ask of 30. He did so, and would even have paid 40, as his view was the stock was worth at least 50% more than that.  But once buying it at 30 it was immediately valued for his books at 20, the bid. So he looks like he has had to take an immediate write-down, despite the facts above. Given that this might lead investors to consider leaving the fund and redeeming, he doesn’t make that investment, even thought the long-term potential, and the immediate intelligence of the decision, were good. In other words, the ability for investors to redeem causes managers not to make good long-term decisions that might not look great at first or even for awhile. While no one said it, I suppose they were all hoping to be able to convince investors to provide permanent capital that cannot be redeemed. I think that is unlikely to happen.

2. The conundrum of the bailout, for example with Citigroup, is that the government is buying preferred stock to give them money to simply continue to pay interest on their gargantuan debt. The better approach would have been to threaten bankruptcy and restructure the debt and give the debtholders a piece of the company in exchange for elimination thereof. The speaker felt that while this should have been done already, it is what will happen next for companies like Citi. Only when that happens will these behemoths begin to really recover.

3. Hedge fund guys are still making a lot of money off their management fees. One said they should feel funny being “the only guys on Wall Street making money right now.” But he also felt that it was time to get back in the game, that fund managers were not hired by the investors to sit in cash, but rather to find ways to invest in all markets. I hope that happens!

4. No one said it, but I think the feeling in the room was that the Obama plan was not necessarily what is best for the market or the economy. The cocktail chatter was that the President doesn’t really understand Wall Street and, they felt, doesn’t seem to want to, and in fact wants to blame Wall Street for many of the country’s ills. The conclusion: it will not be a good long-term economic strategy for the President to make Wall Street the bad guy.

There were some awesome brains with really smart ideas in the room, let’s hope they get their chance to be heard in Washington.

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