Hedge fund managers 'funereal' in midst of crisis More pain expected, but some look for opportunities in 'rubble', PART 4

Part 4

By Alistair Barr, MarketWatch

Last update: 8:32 p.m. EST Nov. 7, 2008

'Carnage'

Seth Klarman, a top-performing value investor and head of The Baupost Group LLC, told clients in an Oct. 10 letter that the economic downturn could be "vicious and protracted."

"The financial market collapse and bailout makes us sick," he wrote. "There is likely more carnage to come."

The U.S. dollar will likely weaken and its reign as the world's reserve currency could end, Klarman predicted. Longer-term, U.S. interest rates may rise as foreigners have to be enticed more to invest in dollar-denominated assets, he added.

The recent Treasury Department bailout has yet to be paid for and should add to inflationary pressures over time, especially when the economy begins to recover, he said.

Hedge fund managers 'funereal' in midst of crisis More pain expected, but some look for opportunities in 'rubble', PART 3

Part 3

By Alistair Barr, MarketWatch

Last update: 8:32 p.m. EST Nov. 7, 2008

Buffett bashing

"Be careful buying ANYTHING today," Kyle Bass, managing partner of Hayman Advisors, warned in an Oct. 17 letter to investors.

"There will be a time to buy stocks," he added. "That time is a few years into the future when the strong have separated themselves from the week ... a time when unemployment has hit 10% and U.S. GDP has dropped 4-5% (maybe more)."

He criticized Berkshire Hathaway Chairman Warren Buffett who advised investors to buy U.S. stocks in a New York Times column last month.

"Mr. Buffett has enough money to be able to have his holdings drop 50% and still fly in his jets and live the way in which he has become accustomed," Bass wrote. "Do you have enough capital to take what you have left, cut it in half, and continue to live the way you have for the past few years? I don't."

Hedge fund managers 'funereal' in midst of crisis More pain expected, but some look for opportunities in 'rubble', PART 2

Part 2

By Alistair Barr, MarketWatch
Last update: 8:32 p.m. EST Nov. 7, 2008

'Funereal'

Steve Galbraith, a partner at Lee Ainslie's Maverick Capital, read about 25 letters other hedge funds sent to their investors in October.

"The tone of the discourse was funereal," he wrote in Maverick's own Oct. 9 letter to clients. "The global economy has already entered a grim recessionary period akin to those of the '90s and '80s rather than the shallow post tech bubble recession of 2001-2002."

The Maverick Fund, Ltd. was down more than 7% last month through Oct. 17, leaving it off roughly 26% so far this year, according to a hedge fund performance report compiled by HSBC's private bank.

In Maverick's Oct. 9 letter to investors, the firm reported that its funds lost between 14.4% and 40.6% during the third quarter.

"I cannot find words to describe our disappointment, embarrassment and shock over the above results," Ainslie wrote.

Oct. 1 marked the 15th anniversary of Maverick Capital, during which time Ainslie has outperformed the S&P 500 handily.

But Maverick couldn't shelter from what Ainslie called a "perfect storm" of hedge fund de-leveraging and failure, short selling bans, slumping equity markets, faltering prime brokers and a spike in volatility.

Hedge fund managers 'funereal' in midst of crisis More pain expected, but some look for opportunities in 'rubble', PART 1

Part 1

By Alistair Barr, MarketWatch

Last update: 8:32 p.m. EST Nov. 7, 2008

SAN FRANCISCO (MarketWatch) -- In the midst of the worst financial crisis since the Great Depression, several top hedge fund managers sent a grim message to their investors in October: it isn't over.

One said he was sickened by the crisis, while another admitted shock and embarrassment at the severity of the market slump and the losses his firm suffered. A third warned clients to be careful about buying anything and said it will be years before investors should buy stocks.

Such pessimism is often taken as a sign that markets may have hit a bottom and most of the managers realized this. Indeed, some said they'd already begun buying securities that they think are cheap enough to discount all the gloom.

The Standard & Poor's 500 index slumped more than 16% in October, while credit markets collapsed.

Spreads on investment-grade corporate debt jumped by 151 basis points, while junk bond spreads surged by 521 basis points to a record 1,617, according to CreditSights.

Losses in these markets so far this year reached 19% and 31% respectively, prompting the fixed-income research firm to ask "Can it get any worse?"

Hedge funds have been hit particularly hard by this market collapse. The average manager lost 5.43% in October, leaving them down more than 15% so far this year, according to preliminary estimates on Friday from Hedge Fund Research.

That puts the $1.7 trillion industry on course for its worst year since at least 1990, when HFR began tracking performance. Before 2008, hedge funds had only one down year in that time: in 2002 they lost 1.45% on average.