The other morning we were treated to yet another hedge fund blowup story on the front page of the Wall Street Journal: “Troubles at Fund Snare Doctors, Football Players” (Subscription Required). Kirk S. Wright and his firm, International Management Associates, appear to have lost the fund’s 500 or so investors most if not all of the $115 million that they invested.
The failure of Wright’s fund adds to a long and growing list of hedge fund meltdowns, large and small. Usually only the large failures make the news, such as Bailey Coates Cromwell Fund ($1.3 billion), Marin Capital ($1.7 billion), Aman Capital (est. $1 billion), Tiger Funds ($6 billion), and Long-Term Capital Management ($1 billion). But according to Nina Mehta, reporting for Financial Engineering News, failures are common and their causes are numerous:
“A March study by Capco, a financial-services consultancy and technology provider, offered some grist to those unsure how significant operational risk can be. The firm investigated 100 hedge fund failures over the last 20 years and found that half of them failed because of operational issues rather than lousy investment decisions. These include misrepresentations and inaccurate valuations, fraud, unauthorized trading, technology failures, bad data and so on. The evidence for change may be somewhat anecdotal, but a number of industry experts say they see increasing hedge fund attention to operational issues.”
So who cares if a bunch of rich guys lose a lot of money on a few bad bets? There are three major issues.
