For the overwhelming majority of investors in hedge funds — and fund-of-funds managers, and hedge-fund consultants, for that matter — it’s really hard to get a solid grasp of any given fund’s risk management procedures. All funds will tell you that risk management is their first priority, but as a result of that such protestations are not very useful.
One consequence of this is that the hedge-fund universe is increasingly dominated by large professional managers: their relatively long histories of managing money and a large number of employees mean that their protestations about risk management start to ring true. Some of those managers, such as Fortress and Man Group, have taken the extra step of going public, which opens them up to more scrutiny and reassures current and future investors even more. Not only do such investors know that there are a lot of eyes on these managers, but they also know that the managers have every internal incentive to avoid blow-ups, since one big failure at one of these groups will adversely effect all of the other funds in the group as well. After all, if there was clearly insufficient oversight when it came to the managers of Fund A, there’s not much reason to trust in the managers of Fund B, and so the failure of Fund A is likely to have nasty effects on all the other funds in the group.
Which is why today’s news comes as something of a surprise.
Simon Treacher, a fund manager at publicly-listed BlueBay Asset Management, has been fired from his job for "breaching internal valuation policy", and his fund, the BlueBay Emerging Market Total Return Fund, is being closed down after losing 53% year-to-date.
Treacher was in many ways the face of BlueBay, an emerging-markets veteran who was at BlueBay from its inception and who was previously a key executive at the enormous and widely-feared Moore Capital; before that, he had run the largest emerging-markets fund in Europe, at Deutsche Asset Management. He’s no rogue trader, and neither is he a fresh-faced kid who’s only known up markets and who had no idea that EM investments can ever go down.
Paul Murphy thinks that Treacher’s being thrown under the bus in a desperate attempt to save the company, and notes that the FSA is investigating what’s going on. But all the same, Treacher was running a long-short fund: there’s really no excuse for its losing more than half its value this year — and probably much more than that, by the time it’s unwound.
Clearly there are problems at BlueBay which are bigger than Treacher — especially since BlueBay admits that Treacher’s mismarks "were too modest to make any difference to the overall net asset value figure" and didn’t cause him any personal gain.
BlueBay’s woes could infect publicly-listed hedge-fund managers more broadly. If it can happen to BlueBay, it can happen to any of them. And if even the big publicly-listed managers aren’t immune from weak risk controls and blow-ups, then there’s really no such thing as a safe hedge-fund investment.
Obviously this one piece of news doesn’t mean the end of hedge funds as an asset class. But it certainly won’t do anything to reassure hedge-fund investors that it’s possible for them to have any real reassurance that their money is safe.