The collapse of the subprime mortgage market, and the subsequent credit crunch that whipsawed stock and bond markets, has pained investors around the world. It has also released a torrent of explanations, excuses, rationalizations and mea culpas from normally secretive hedge fund and private equity managers to their limited partners. Strikingly, their reasons echo one another in blaming many of the troubles on copycat strategies. As in investing, so in explaining. Excerpted below are some of their explanations:
Regrettably we have not had good luck during these last few days of August. We have been caught up in what appears to be a large wave of deleveraging on the part of quantitative long-short hedge funds. These undoubtedly share some signals in common with our own, and the result has been losses for RIEF of the order of 7 percent at the time of this writing.
-- August 9. Letter from James Simons, president of Renaissance Technologies, explaining the poor performance of the Renaissance Institutional Equity Fund.
Our stock selection investment process . . . has very recently been shockingly bad for us and for all of those pursuing similar strategies. The very success of the strategy over time has drawn in too many investors. Now we are witnessing some of them exit, and then with reductions by almost all participants it's painful. I occasionally hear broad statements like "this just shows computer models don't always work." That's true, of course, they don't, nothing always works. However, this isn't about models, this is about a strategy getting too crowded.
-- August 9. Letter to investors from Clifford Asness, managing and founding principal of AQR Capital Management, whose main quantitative hedge fund was then down 13 percent for that month.
The 32 Capital Fund Ltd has experienced an unusual rise in volatility and cross sectional risk. We believe that the catalyst for the abrupt rise in volatility has been non-BGI quantitatively managed hedge funds delevering their portfolios, i.e., liquidating their positions. Other managers appear to be delevering on account of several factors, including redemptions by fund-of-funds, voluntary reductions in gearing levels brought on by the recent change in the volatility regime, and selling by multi-strategy funds looking to raise cash to compensate for losses and reduced liquidity in their subprime and other fixed-income holdings.
-- August 13. Letter from Minder Cheng, global chief investment officer, active equities, for Barclays Global Investors.
We have a strong belief that the delevering in the market is just about 75 percent to 100 percent done. We know where we are, and we are relatively confident that based on the moves of last week, some of these relative moves in the equity long-short position are just unsustainable long-term. When you look at 22 and 25 and 29 percent standard deviation moves, we have seen them twice in our history before, and they've always mean-reverted back.
-- August 13. Conference call with Gary Cohn, president of Goldman Sachs Group, to explain the $3 billion equity investment by Goldman Sachs and outside investors in the Global Equity Opportunities quant hedge fund, then down 30 percent for the year.
Beginning in the last week of June 2007, conditions in the institutional loan and high yield markets have become significantly less favorable for private equity acquirers. The duration of the current credit market conditions pertaining to private equity transactions and the lending environment once this market correction has run its course are unknown, but a prolonged continuation of current conditions could have an adverse impact on aspects of the Partnership's private equity business.
-- August 13. From the 10Q report filed with the SEC by Blackstone Group less than two months after its IPO.
The market conditions surrounding each of our businesses, and in particular our private equity business, have been quite favorable for a number of years. Market conditions may not continue to be as favorable. More costly and restrictive financing may adversely impact the returns of our leveraged buyout transactions and, therefore, adversely affect our results of operations and financial condition.
-- August 13. From the amended form S-1 for Kohlberg Kravis & Roberts & Co., submitted to the SEC a month and ten days after the firm's original filing to do an IPO.
Our equity portfolio has suffered an uncharacteristically sharp drawdown in the last two and a half months, leaving the Fund down 8 percent on the year across its various share classes. Among the forces at work here were gross and net-long exposures above historical average. To state the obvious, this would not have been the case had we understood fully the speed and ferocity with which events would unfold. Further, some of our core longs were simply crushed, and, in nearly every case, the magnitude of decline appears disconnected completely both from underlying equity value-creation stories (which have limited, if any, dependence on access to credit markets) and from visible, secure, increasing company cash flow profiles.
-- August 21. Letter from Tudor Investment Corp. vice chairman James Pallotta, manager of the firm's Raptor Global Portfolio.
We obviously regret deeply the outcome of those mortgage sales and the difficulties that the conduit may suffer in this disturbed market, and that is one of the primary motivations of trying to work with the conduit holders. We fear that those losses have deeper repercussions in the market.
We are going to redouble our efforts. George Roberts and Henry Kravis have been in constant communication every day and every KKR partner and employee has been assisting the effort. It is not enough. We have to go deliver better results. We understand that.
-- August 15. Conference call with Saturnino (Nino) Fanlo, CEO of KKR Financial Holdings, to explain the company's $50 million loss on the sale of $5.1 billion of mortgage loans and the potential for more losses.
Recently, several of our shareholders have asked us for information about the current status of CCC's [Carlyle Capital Corp.] investment portfolio. Because CCC has publicly traded securities and is subject to various rules and regulations pertaining to selective disclosure, we relied on our press releases and our website instead of communicating directly with individual shareholders. We understand these efforts have been unsatisfactory and frustrating to many of you. We sincerely apologize for this lapse in communication.
We designed CCC's business model to withstand a liquidity event equal to the events of October 1998 when the demise of Long Term Capital Management threatened the financial markets. We believe the recent liquidity disruption is significantly worse than the events of 1998 . . . . CCC's liquidity cushion has not been sufficient to meet recent margin calls.
-- August 27. Letter from John Stomber, CEO of Carlyle Capital Corp., after the Amsterdam-listed fund company, which invests in mortgage securities and other leveraged products, needed a $100 million bailout by its parent, the Carlyle Group.
You entrusted us with the management of your money, and we lost a lot of it, to say the least. No apology is sufficient but I want you to know how profoundly sorry and deeply pained I am.
We have sold most of the portfolio to Citadel Investments. We currently estimate that the funds will have approximately $1.4 billion in combined net asset value following the transaction.
-- August 3. Conference call with Jeffrey Larson, managing partner of Sowood Capital Management, days after the once$3 billion hedge fund firm was forced to liquidate the bulk of its portfolio.