Myron Scholes, the 1997 Noble Prize Winning Genius involved in the demise of Long Term Capital Management has done it again. Scholes’s Platinum Grove Fund Halts Withdrawals After Losses.

Platinum Grove Asset Management LP, the hedge-fund firm co-founded by Nobel laureate Myron Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October.

The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors. Funds employing a similar approach of exploiting differences in the value of related securities fell 14 percent last month and 30 percent this year, according to data compiled by Chicago-based Hedge Fund Research Inc.

“The suspension is necessary given current market conditions,” Ryebrook, New York-based Platinum Grove said in an e-mailed statement today. “Platinum Grove will use this period to consult with its investors and counterparties, determine their future intentions and manage the assets of the fund accordingly.”

Hedge funds are reeling from the worst financial crisis since the Great Depression, losing an average of 20 percent this year, according to Hedge Fund Research. A surge of investor redemptions forced firms such as Blue Mountain Capital Management LLC and Deephaven Capital Management LLC to freeze funds to stem the tide of withdrawals.

Scholes, 67, winner of the 1997 Nobel Prize in economics, was a founding partner in Long-Term Capital Management LP, the hedge fund that lost $4 billion a decade ago after a debt default by Russia. He started Platinum Grove in 1999 with Chi-fu Huang, Ayman Hindy, Tong-sheng Sun, and Lawrence Ng, who had all worked at Long-Term Capital.

Please see Genius Fails Again for a recap of the demise of Long Term Capital Management that rocked the world in 1998. In retrospect I should have saved the title “Genius Fails Again” for now.

Man Group Has Record Drop

Bloomberg is reporting Man Group Has Record Drop in London as Assets Decline.

Man Group Plc, the largest publicly traded hedge-fund manager, fell the most in London trading since it went public in 1994 after saying that assets under management declined almost 13 percent since September.

“We’ve had what I would call neck-snapping volatility,” Chief Executive Officer Peter Clarke said on a conference call today. “The market backdrop we have is the worst in a modern generation’s memory.”

Man Group plunged as much as 40 percent after it said profit from continuing operations declined more than analysts estimated. Assets under management, which stood at $70.3 billion as of Sept. 30, fell to begin November at $61 billion, the least since March 2007. Hedge funds in Europe may lose as much as a quarter of their assets as markets drop and clients withdraw money, analysts at Morgan Stanley said last month.

Man Group’s assets under management were also diminished by its decision to reduce the amount it borrows and invests in Man Global Strategies, a hedge fund product that allocates money mostly to new hedge fund managers. Assets in that program will fall to about $1 billion from about $8.6 billion as of Sept. 30, Clarke said. Man Group already has slashed borrowing by $3.5 billion and will complete the “deleveraging” by year end.

With the average hedge fund down 18 percent this year, as measured by the HFRX Global Index, managers are selling assets to repay departing investors and meet demands from lenders for more collateral.

Lyxor Asset Management, the Societe Generale SA manager that oversees about $115 billion, predicts at least 30 percent of the world’s hedge funds will go out of business as returns drop and clients withdraw money.

“I’m optimistic and I see 30 percent of funds closing,” Nathanael Benzaken, a managing director at Lyxor who helps pick hedge funds for clients, said at a briefing in Milan today.

Hedge Funds Limit Redemptions

With hedge funds, you can get in, just don’t think you can easily get out. Dozens of Hedge Funds Have Blocked Redemptions.

Dozens of hedge funds have told investors they cannot get their money back right now as managers try to limit a wave of redemptions to safeguard all their clients’ investments — as well as their own futures.

“Everyone is looking at their gate provisions (mechanisms that limit redemptions) and what rights they have to close their gates,” said Timothy Mungovan, a partner who advises hedge funds at law firm Nixon Peabody LLP. “It is a phenomenon that has been occurring for some time and is picking up pace now.”

On Thursday, Knight Capital Group’s Deephaven Capital Management halted redemptions at two of its hedge funds.

Recently, hedge fund firm Basso Capital told investors it was postponing redemptions. Hedge fund firm Ore Hill Partners imposed a gate in late August.

Before that Drake Capital Management and Pardus Capital Management began restricting clients’ departures and Ellington Capital Management stopped allowing investors to exit one of its portfolios last year.

“Restricting redemptions allows the managers to withhold selling into unfavorable markets,” said Michael Tannenbaum, a partner at law firm Tannenbaum Helpern Syracuse and Hirschtritt LLP, explaining that panic selling in these markets can be “harmful to both sides: the investor and the redeemer.”

Spooked by hedge funds’ worst-ever returns at a time the average fund has lost 20 percent this year, pension funds and wealthy individuals alike are leaving hedge funds faster than ever before, lawyers and managers said.

Between July and September, investors pulled out a record $31 billion, which helped shrink the industry 11 percent to $1.7 trillion. And more redemptions are expected to flood in by November 15, the deadline to get money back by year’s end, industry lawyers and investors said.

Case Against Hedge Funds

  • No transparency. You have no idea what the fund is doing or holding.
  • Leverage is a two way street. Excessive leverage is now exacerbating losses.
  • Exit restrictions. You cannot get out when you want to.
  • Whopping fees. Hedge finds take 2% off the top plus 20% of profits. That 20% of profits encourages excessive risk taking. If the fund blows up the manager just starts another one.
  • Hedge funds are supposed to make money no matter which way the market goes, or so they claim. To collectively be down 18%, they had to have been making one sided bullish bets on something. Where’s the hedge?

A massive and long overdue consolidation in hedge funds is coming in 2009-2010. I concur that a 30% reduction in the number of funds may be optimistic. A far bigger reduction in assets under management is nearly guaranteed.

Mike “Mish” Shedlock
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