Some More Hedge Funds Biting the Dust

I've talked about this subject a few times - guys in hedge funds taking huge risks; and as long as they are successful for a few years they generate what I term generational wealth (the type of wealth that lasts for your grandkid's grandkids). Then they blow up. [Mar 28: Founder of Long Term Capital Failing Again] They say it's a once in a 500 year event; a black swan. Somehow these black swans happen every 4-6 years, where hordes of hedgies blow up because they don't manage risk - but don't worry about small details like that.

Investors get pennies on the dollar (or in this case $0). They could not even sell if they wanted to because they are "frozen" as the hedge fund manager deems must happen (see below for an example) A few years later they are given money to manage again... because they are just that smart. As if anyone who does not take crazy leveraged risks could not print money for 2-3 years. It's an amazing situation; I assume others who actually manage risk deserve a chance too... but I guess I live in a fantasy world. On to the latest story...

• Several hedge funds run by flamboyant Key Biscayne trader John Devaney that were worth more than half a billion dollars last year have been wiped out, leaving wealthy investors with nothing. Zero.
• About 150 investors -- some of them his Key Biscayne neighbors -- have lost roughly $510 million, said Devaney, chief executive officer and senior portfolio manager for United Capital Asset Management.
• ''Most of the investors were institutions. Some are friends and family who were not solicited to invest,'' Devaney said in an interview Wednesday. ``There were a few high-net-worth individuals who had losses. I was the second biggest investor in the fund.''
• The collapsed hedge funds -- Horizon Fund, Horizon ABS Fund, Horizon Fund III and Horizon ABS Master Fund -- invested in junk bonds. These high-risk debt securities have lost the vast majority of their value during the yearlong credit crunch that has sapped demand for most bonds that do not have AAA credit ratings.
• Devaney, 38, a prominent bon vivant, put his personal losses at more than $100 million. Before his funds began to sour, he owned multiple homes, yachts, a $35 million Gulfstream jet and a collection of Impressionist art.
• According to a letter Devaney sent to investors Wednesday, the ultimate blow came at the end of June when Deutsche Bank, the funds' key lender, issued a margin call -- or demand for additional collateral -- after deciding the existing securities had declined in value.
• Troubles first surfaced last July when Devaney took the extraordinary step of halting withdrawals, citing a rush to the exits by investors amid subprime mortgage woes. At that time, Devaney told investors he wanted to avoid selling off the investments at fire-sale prices in hopes they would rebound as the bond market normalized. But the bond market hasn't come back.
• At first, the hedge funds also proved highly profitable, making more than a 40 percent annual return during 2005 and 2006
• After freezing the funds last July, Devaney began selling off personal assets, including a 142-foot yacht called the Positive Carry, and the jet. He also put up for sale a 16-bedroom Aspen, Colo., vacation property and listed for sale a number of waterfront residential properties on the key.
• ''We put a lot of properties on the market -- my father-in-law's, my mother-in-law's, my sister-in-law's, my mother's,'' Devaney said. ``My home is not for sale.'' (of course not)
• ''It's very unfortunate this happened,'' he said. ``But I'm not going to stop trading bonds.''

Look for Mr. Devaney to have a new hedge fund up and running by 2011 at the latest. And no, I am not being sarcastic. That is how it works.

[Apr 8: Hedge Fund Manager - Good Work if you can Get It]